Before you sign your mortgage contract, be sure you understand the terms and conditions that you’re agreeing to. This includes:
loan interest rate
whether the interest rate is fixed or variable
loan term length
due date for your monthly payment
when your first payment is due
whether there is a grace period between the payment due date and the date when the lender assesses a late fee
when your payment will be considered late and the penalties for making a late payment
the penalties for missing a payment and when the lender may initiate foreclosure proceedings
whether there is a penalty for paying off the loan early (called a prepayment penalty), and if so, what it is
whether your payments include escrow for taxes and insurance or if you must make those payments directly
whether your payment includes private mortgage insurance (PMI) or any other fees
Mortgage interest rates are impacted by what is happening in the nation’s economy. In a sluggish economy, interest rates stay low because fewer people are borrowing money and there is less concern about inflation. When the demand for borrowed money and concerns about inflation increase, interest rates also rise.
The interest rate on your mortgage also depends on a variety of factors specific to you and your loan:
- Loan size (conforming vs. jumbo)
- Type of interest (fixed or variable)
- Length of the loan term
- Competition among lenders in the area
- Credit score
- Down payment amount
- Any discount points purchased
Remember—when comparing loans of the same length, the higher the interest rate on your loan, the higher your monthly payments.
Length of Loan
The length of your loan, also called the loan term, affects the amount of your monthly payments as well as how much you’ll pay overall in interest throughout the life of the loan. How long you have to pay off a loan depends on the loan, but the term usually ranges from 10 to 30 years. Long-term loans—think a 30-year mortgage—mean more payments and more interest over the life of the loan but lower monthly payments each month. A shorter-term loan—say, a 15-year mortgage—often means you’ll pay less interest on the loan over time but higher monthly payments.
Private Mortgage Insurance
Your mortgage contract may require you to purchase private mortgage insurance (PMI), which is insurance that protects lenders in the event you’re unable to make payments on your loan. Lenders may require you to purchase PMI if you’re putting down less than a 20% down payment toward the home purchase. Veterans Affairs (VA) mortgages are exempt, and Navy Federal also offers additional no-PMI loan options.
PMI fees typically range between 0.5 and 1 percent of the loan amount per year. For example, a 1 percent PMI on a $200,000 loan would add an additional $167 to your monthly mortgage payment, or an extra $2,000 per year.
Lenders typically only require PMI until your equity (amount of the home you own) reaches a certain threshold, called the loan-to-value ratio. However, some FHA loans require mortgage insurance premiums (called MIP in the case of FHA loans) for the life of the loan, so be sure to understand the terms of your loan.
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