- What is the true cost to own a mortgage?
- How big is interest rate in that total cost?
- Which cost factor people care about most?
- What other elements about interest rate must be looked into?
- What are the different ways interest rate is calculated and how does it affect me?
- Does mortgage term affect interest rate?
Most of the borrowers think that interest rate is the only cost of owning a mortgage. There may be other factors that one should also consider. How interest rate is calculated? Is interest rate fixed or variable? What are prepayment penalties? What is the closing cost? It may not be actually true in all cases. People buy more houses during lower interest rate periods and stay away during high interest rate times.
Mortgages are usually available from 6 months to 5 year period but in a very few cases mortgages are available for longer or shorter periods. When getting a mortgage for shorter period, interest rates are usually lower than those charged for mortgages for longer terms because lenders want some cushioning against the risk extended over longer term. Things can be predicted more precisely for shorter periods than for longer periods. This principle affects all financial matters. One should balance savings in interest cost of short term mortgages with fluctuations of interest after term is over, worries of getting another mortgage after short term, peace of mind and how long you will stay in your house? In order to deal with this dilemma, there are other products available like “portable mortgage” (can be taken from one property to another), “convertible mortgage” (buyers have right to convert their mortgage to longer term if rates hike) etc. Be vigilant especially during the periods of fluctuating interest rates.
Calculation of interest rate is very important factor. One should pay special attention to the number of times interest is calculated on your mortgage in a year. The more often interest is calculated during the year, the greater is the cost to own that mortgage because it benefits lender more. For example:
- 8% calculated monthly means effective annual interest rate of 8.30%.
- 8% calculated semi-annually means effective annual interest rate of 8.16%.
- 8% calculated annually means effective annual interest rate of 8%.
Also make sure that clause reads not in advance in the interest calculation section which actually means that payments are made “not in advance”, at the end of the period rather than at the beginning.
