Anyone who may be looking to purchase a new home or refinance their current home should have a thorough education on certain aspects of the mortgage industry. No one wants to make an uninformed decision, especially when it comes to making such an important financial investment.
First thing’s first, let’s talk about the money. Remember back when you were a kid and you wanted that special brand of sugared cereal, the newest toy or game? If your mom was a savvy shopper she’d say “Wait until it goes on sale”. Because we’ve all heard of this phrase on so many occasions, we have all learned to live by it. We are attracted to the words sale, rebate and bargain. We’re also attracted by discounted prices. We love the idea of obtaining something that is valued at a higher price, but not having to give up an arm and a leg to get it.
So when you’re in the market for buying a home, as a buyer, you want to make the best financial decision possible. That would be buying a great house but not necessarily having to spend your life savings on it.
When you’re looking to purchase a home, you have to first seek out a loan (in most cases from a mortgage broker or bank). Once approved, the broker or bank will give you the loan amount to purchase the house. You then pay money back to the bank until your house is paid off.
The best time to purchase a home is when interest rates on mortgages are low. This is because, you are paying less money back on what you initially borrowed in order to purchase the home.
What do interest rates have to do with purchasing a home?
Interest rates affect your monthly payment, by determining how high or how low these payments will be. For example: The house you have your eyes on is $220,000.
- You make a down payment of $20,000 (10%).
- The remaining principal (the amount of the loan you will need for the house) is $200,000
- Remember, upon paying back the loan, you must pay on the principal amount of the loan, as well as the interest on the loan every month
- If your interest rate is 5.5%, you’d be paying about $1000 in interest every month, plus your house note and all of the other fees that come with owning a home
- If your interest rate is at 4%, you’d be looking at paying a bit over $700 a month in interest
As you can see, a small increase or decrease in your interest rate can have a serious impact on your monthly payments. The lower the interest rate, the more affordable your monthly payments have the potential to be.