Mortgages are financial instruments offered by lenders that help you buy property in Philadelphia. You repay the lender that money and interest at a rate that was offered at the time you obtained your loan. When it comes to the interest, much is made about the fact that an increase in the rate affects your monthly payment along with your ability to repay the loan. While this is true to an extent, a change in the interest rate doesn’t have as much impact as you may think. It’s true you will pay more in interest on the money you borrowed over time, but you may still be able to afford the house of your dreams.
Understanding Amortization Schedules for Mortgages
Amortization means paying off a loan with the same payment amount on a set schedule. A mortgage is amortized over 30 years and has the same payment amount over the term of the loan. Each payment that is made goes towards the interest and principal, but not equally. An amortization schedule shows just how much of the monthly payment goes towards interest with the remainder going towards principal. Mortgage amortization shows the larger balance of the payment going towards interest with the remainder going towards the principal balance. As the mortgage ages, more money goes towards principal than to interest. This is a simple explanation of how amortization works. Talk to a broker at a Philadelphia mortgage company to learn more about how amortization works.
How Interest Influences the Monthly Mortgage Payment
When you get a mortgage, you are locked into the interest rate for the life of the mortgage. This creates a predictable payment that won’t change from month to month, year to year and makes it easier for budgeting. But you may think, and rightly so, that an increase in interest rates will greatly affect your ability to buy a home. And it can, but not as much as you would think. A one percent rate increase won’t raise your monthly payment by that much and you may find it’s still within your ability to pay.
Differences in Monthly Payments at High and Low Interest
Let’s take a look at two fictional homes: one costs $100,00 and the other costs $450,000. For the purposes of this exercise, let’s consider this the final cost of the home after the down payment has been made.
The $100,000 house at a 4 percent interest rate has a mortgage payment of $477 a month. Go up to 5 percent interest and the mortgage payment reaches $538, a total of $61 more a month in payments.
Now, let’s take a look at the numbers for a $450,000 mortgage: At 4 percent, the monthly mortgage is $2,148. Raise the interest to 5 percent and the mortgage goes to $2416 or about $270 more per month.
In both cases, the 1 percent difference in interest didn’t make a very big jump in the monthly payment, relatively speaking. Someone buying in either bracket may find it’s not a major difficulty to spend the extra money every month as they’re already expecting to spend about that much on the mortgage. And as previously mentioned, the mortgage amount won’t change because interest is locked in for the life of the loan. The house gets paid off as long as all the payments are made on time.
What Happens if Interest Rates Drop After a Mortgage is Originated?
A mortgage can be refinanced via a no-cash refinance that leaves the equity in the home. The mortgage holder can opt to lower their monthly payments with the lower interest rate, lengthen the amount of time they have to repay, or keep their current payment as-is so they can pay their home off sooner. It’s best to talk to a Philadelphia mortgage company about what options are available in the event interest rates drop far enough to make a refinance a good idea.