What is a mortgage?

A mortgage will give you a specific sum of money for a fixed tenure like 15 years or 30 years at a particular rate of interest, against the value of your house. It is an agreement between the lender and the house owner who pledges the house as security. By taking a mortgage you give the lender a document that protects his interests in your property. The county records the lien and you retain the title to the property. There can be no change of ownership until you repay the debt and get back the lien. However, if you default on the debt, the lender can sell the property to get back his loan.

Different types of mortgage

You can take a mortgage at a fixed rate of interest or an adjustable rate of interest. In a fixed rate mortgage, you pay the same sum of money towards interest throughout the tenure of the mortgage. An adjustable rate of interest you may have to pay a variable rate of interest during the tenure of the loan. This means the monthly installment may increase or decrease, so you must always have a particular liquidity in your account to pay this installment. The monthly installment also depends on the amount of down payment you make in the beginning of the mortgage. The greater the down payment, the smaller will be your monthly installments. Another important factor in a mortgage is its length. A shorter length means larger monthly installments and a longer length means smaller monthly payments. However, in a longer tenure mortgage you end up paying more money towards interest repayment and not repayment of the principle amount. Based on the above considerations and your financial obligations over the next few years, you will need to consider carefully the amount of the mortgage, its tenure and the rate of interest. Moreover, you must do some research and shop around for the best interest rates possible.

Benefits of going for a mortgage

You can re-mortgage your house to tide you over an impeding financial emergency. It can help you finance your child’s college education. It can provide funds for home improvement or any medical emergency.

Mortgage calculators

As explained above you need to work out the monthly installment under different scenarios. It is a tedious process and you can use mortgage calculators available at different websites related to home finance. This will calculate the monthly installment for you quickly. Here is an example of a mortgage calculator for a fixed interest mortgage. You enter the mortgage amount; say $10,000, the annual interest rate of 6.5% for a fixed interest mortgage for 30 years. The calculator will give you the amortization schedule for every month of those 30 years. It details the repayment of interest, principle, and balance for all 12 months of those 30 years.

Similarly consider an adjustable rate 30 year mortgage, for a loan of $100000, when the house appraisal value is $125000. The calculator adds the property taxes, property insurance, state, federal taxes, and the initial interest rate. You must specify the number of months before the interest rate can change, the band within which interest can vary as per your budget, the maximum & the minimum interest rate, and the index rate change per adjustment, the margin and the index rate, as well as the months between index adjustments. Other parameters that can change include a rise in interest rates or a fall in interest rates. You can now imagine the number crunching involved in manual calculations, because of which it is advisable to use an online mortgage calculator.

Study this comparison between a short –term and a long-term mortgage for a loan amount of $100,000.The short-term loan is for 15 years and the long-term loan is for 30 years. The mortgage calculator will calculate your monthly installments including property taxes, state and federal taxes, origination fees and upfront costs. It will calculate the savings you can make and then you can decide on the tenure of the mortgage.

How not knowing your monthly payment for a mortgage can hurt you

As is clear from the above discussion, a mortgage involves several variable factors. You must decide the amount of mortgage you require based on your future commitments. If you have a steady source of income, you can go for a variable rate mortgage, as you are not short of funds. However, if you have no steady income, it is best to go for a fixed rate mortgage as you can arrange for a fixed sum by the due date of payment. Therefore, it is best to work out your monthly installment for each scenario based on your financial strength and expected future income. Since you have to make monthly payments over a long duration, it is best to provide for them in advance. If you default on your monthly installment, it can harm your credit rating and hamper chances of future credit. Think hard about all the parameters discussed above and only then go for a mortgage if you can service it over 15 to 30 years as the case may be