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Five Main Factors that Determine the Cost of a Mortgage
Mortgages are comprised of five main parts that are essential to understand clearly before borrowing – the principal, interest rate, term of the loan, points, and fees.
The principal is the total amount of money you borrow. Your down payment is not included in this figure, so the principal is essentially the price you paid when purchasing the house minus the down payment.
The interest rate plays a key part in deciding which mortgage is best for you, since it may end up costing you more than the house itself. Interest is the cost of borrowing money, usually expressed as a preset percentage of the amount borrowed. Loan interest rates can be fixed, adjustable, or a combination of both. The interest rate is the main contributing source of cost for your mortgage.
The term of the loan refers to the amount of time it will take you to pay the loan off. Since you have to pay more interest with longer terms, it follows logic that lengthier loans are pricier.
Points are optional interest payment on the loan at the close of the mortgage (ie, when you have signed loan documents). Each point equals one percent of the loan amount. Borrowers often pay points in order to lower the interest rate which in turn lowers the monthly payment. Over the long term, this option may save you thousands of dollars.
Last but not least, fees are amounts of money paid to the lender at the time of closing to cover the cost of the mortgage. These fees may include escrow fees, title fees, processing fees, appraisal fees, document fees, and more. Sometimes lenders may charge an origination or application fee. There may also be fees associated with your state or loan program.
With the knowledge in the five basics, you'll be one step closer to getting the most out of your mortgage.
Steve Baik is a contributing editor for multiple websites related to credit and personal finance. He is the chief editor for CreditServicer.com. He also edits part-time for
About the Author: Steve Baik is a contributing editor for multiple websites related to credit and personal finance. He is the chief editor for CreditServicer.com.