Understand how much your mortgage costs
Most Americans believe that interest is not expensive. According to a survey by credit reporting agency Trans Union’s TrueCredit.com division, 62% of respondents believe that in repaying a 30-year fixed mortgage, the interest payments will not exceed 100% of the amount borrowed. Put simply, most people believe that they will repay twice the price of the home, with the extra going toward interest.In reality, a 30-year fixed rate mortgage can lead to interest payments of much more than 100% of the amount borrowed. The effect of compound interest can make a home purchase quite expensive, and the size of the mortgage will dictate just how much the interest will cost over the life of the loan. In order to avoid overpaying, it is prudent to offer as large a down payment as possible in order to reduce the amount borrowed. This approach literally can lead to hundreds of thousands of dollars in savings.
Additionally, the interest rate can have a profound impact on the interest payments over the life of a 30-year mortgage. It is important to get as low an interest rate as possible in order to slow the effects of compound interest and realize a cost savings every month. Consumers also should keep track of interest rate changes in order to take advantage of drops in rates that could provide a refinancing opportunity. Simply by monitoring the mortgage market, even in passing, can provide the information necessary to take advantage of lending changes that can benefit the consumer.
The TrueCredit.com study found that 24% of American homeowners claim to be concerned about the monthly cost of their mortgages, and that fixed rate mortgages are most popular. 49% of homeowners have fixed rate mortgage loans. The remainder is split among Adjustable Rate Mortgages (ARMs), interest-only mortgages and other mortgage products that have only specific applicability.
13% worry about negative equity. Negative equity occurs when the amount that the homeowner owes is greater than the value of the home itself. When this occurs, the home is no longer sufficient collateral for the mortgage. If the homeowner wishes to sell, there are only three viable alternatives. The homeowner could come up with the difference in cash, roll the negative equity into the next mortgage (assuming the homeowner is buying a new home) or sell the home and refinance the remaining debt into an unsecured loan at a substantially higher interest rate.
In order to get the most from your mortgage, it pays to understand how this market works. TrueCredit.com’s survey found that few homeowners really understand what their mortgages mean, aside from a certain amount to be paid every month. If you invest your time into understanding your mortgage, you have the potential to save hundreds of thousands of dollars over the life of your mortgage. Watch interest rates, and make a down payment if possible. Always be ready to refinance, and don’t borrow excessively against your home. With these four tips, your home will become a more productive asset.
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