Mortgages are often one of the most significant financial commitments most of us will ever make. Home loan interest rates are rising, so is it more important to focus on the interest rate or the total payment when shopping for a mortgage?
We believe payment should be the focus. Here’s why:
Focusing on the monthly payment can help you choose the right home.
As mentioned above, a mortgage is most likely the most significant financial commitment many of us will make in our lives. This is why it’s so important to get as much information as possible to make a well-informed decision. One of the main aspects to consider when deciding on a home mortgage is how much mortgage you can comfortably afford with all possible expenses included. A lender will typically look at your gross income, the new housing payment, and any recurring debts you have on your credit report to determine what they think you can afford. They do not factor in variable items such as childcare, food, gas, and living expenses. So what they think you can afford may not necessarily be the same as what you feel you can afford. Your affordability is generally based on your income or the combined household income if you live with a friend, spouse, or partner. A good rule of thumb is that you should not spend anything more than a third of your income (after tax and deductions) on your living costs.
While an interest rate is a factor in the payment to guide your decision, other expenses such as insurance, taxes, HOA fees, and CDD costs should also be considered. Think about the monthly payment you can afford and discuss it with a loan officer so you can make some essential financial decisions about how much of a mortgage you should take on.
Help create a budget.
When making the financial commitment of a home mortgage, how you manage your finances becomes incredibly important. This is why it is essential to choose a home and mortgage that you can afford. While focusing on the monthly payment can help you choose the right home, it can also help you budget your monthly expenses.
With a monthly payment in mind, you can easily create an accurate budget to plan out your finances in a much more detailed and helpful way. Unlike an interest rate that would still require you to do additional calculations yourself, a monthly payment can help you design a realistic budget to maintain your new home.
Budgeting effectively is even more critical for investment and rental properties. This is because the monthly payment can give you a good indication of how to price your property when you list it for rent to pay the mortgage and make a profit.
Payments already take the interest rate into account.
Lastly, focusing on the monthly payment for your mortgage does not disregard the interest rate. The interest rate for your mortgage is a vital component of the mortgage and is used in the calculation to figure out your payment every month. However, you do not get as much information from the rate itself compared to the monthly payment.
The monthly payment takes the interest rate into account and provides you with a simple and easy way to understand how much you will be paying. When you make your payment every month, a portion of the amount goes toward the principal debt, while the rest goes toward interest and any associated escrow accounts.