A good majority of homeowners in America pay monthly payments to cover for their property that’s been mortgaged. The industry in itself turns over billions of dollars a year, which should give a person an idea of how many people are in this business and how many families pay monthly mortgage payments. When viewed from the homeowner’s side, mortgage payments aren’t always paid with the brightest of smiles and the happiest of faces; in fact, many, according to an independent research, despise the mortgage system and a majority claimed they were ‘unhappy’ with their mortgage and the requisite payments, which include the interest on top of it. So, to save you from some of that headache, we answer the question: which combination of factors would result in the lowest monthly mortgage payment?
The simple matter of fact is this: mortgage payments are really based much on the interest that is levied on the regular payments. Which means, that it is not the actual mortgage payments themselves that are cause for much disdain, but the exorbitant interest rates that inflate the price to levels where people simply can’t think of anything good while making the payment. Add in the responsibility of shelling money out every month, a big cut from your already measly pay check, and you can guess for yourself why it is such a big deal and why people try to get a deal that means reduced monthly payments in lieu of mortgage payments.
So, what does this question ‘which combination of factors would result in the lowest monthly mortgage payment’ mean? Is it entirely possible that payments can be determined by the payee themselves and not the greedy bank? Or is it some magical concept that is yet not available for the hoi polloi? This and more in the passages below, but first, what actually is a mortgage? Lets dive into that.
What actually is a mortgage?
A mortgage is defined as a loan secured to purchase land, home or any piece of property. In the case of a mortgage, the actual value of the house or property acts as the collateral for the lending authority (bank or any other credit institution). This means that should you get behind on the repayments of the mortgage, the bank or lending authority will have every right to foreclose the property, take it off the borrower’s hand and sell it in the market to recoup their losses.
This method of mortgaging and home buying was introduced and formalised in 1930’s, when America was going through the Great Depression and to keep the economy vitalised, the federal government allowed banks to open up credit for everyone, encouraging people to invest in properties and let cash circle through the economy. It also meant that down payments for housing went from 50 per cent to 20 per cent and stable interest rates meant that more people could now afford to buy their own homes at payment plans that they could afford with their pay checks.
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What determines the monthly mortgage payments?
There are a number of factors that determine what the monthly mortgage payments will be, but some common determinants are as follows,
- Time: How much time does it take for the repayments to cover the total actual cost and the interest accumulated.
- Interest rate: Interest rates are the rates per month or on the cumulative amount that the bank charges on top of the actual repayments.
- Down payment: The payment which the buyer pays upfront to the owner of the property that is not part of the mortgage repayments.
These three are the major determinants of how low the monthly mortgage payments can get. If used in the right way and with the right combination of these three, monthly mortgage payments can go low enough so as to not disturb an individual’s savings or eat into their pay checks. Below is an explanation of how these factors can contribute to your monthly mortgage payments being low.
Duration of mortgage (time)
The first and foremost factor is of the duration of the mortgage. As well-informed people will already know, a mortgage can go all the way from five years to thirty years. But of course, the five years one is pretty rare; because of the short duration of time, this would allow for monthly repayments to be obscenely high and downright unpayable for the borrower.
As you would expect, the most popular mortgage duration term in America is 30 years, which gives an individual plenty of time for repayments, which in turn keep the actual monthly payments low. Plus, they also allow for a significant leeway in non-payment period, which refers to a borrower following a couple of months behind on their repayments; because the total term is 30 years, banks and lending authorities treat it with lax regulations and oftentimes, with no penalties at all.
To keep the monthly mortgage payments low, one needs to chalk out a plan that incorporates the maximum possible term of years (preferably around the 30-year mark). This will ensure that the monthly payments stay low and affordable since the cumulative time is a hefty 30 years, meaning the bank will get the total payment, they just need to wait.
One of the most crucial determinants of a monthly mortgage repayment plan, interest rates are almost always fixed as per the institution or bank that one is borrowing from. However, there are cases where a friendship or even a nice manager or loans manager did somebody a favor and set the interest rate at a pretty manageable amount.
With that being said, interest is an unfortunate reality that every American has to live with; its what powers the banks and the financial institutions and earns them money. The system, unfortunately, is designed in such a way that interest can be found in every nook and cranny of the financial world. And mortgages are no different.
Again, to keep the monthly mortgage repayments low, the interest rate also needs to be kept low, be it from mutual understanding between the bank and the borrower, or as a pre-fixed interest rate offered by the lending authority itself. This will ensure that a good portion of the payment is the actual amount of the loan, and only a small portion is the interest on top of it.
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Down payment is the amount of money paid upfront, also sometimes known as ‘token money’, to ensure that the bank does not bear all the costs and that some of it is actually paid lump-sum by the person purchasing the property.
Down payment, as explained beforehand, prior to FDR’s New Deal, was around 50 per cent, meaning that a person purchasing a home would have to deposit half the amount, lump-sum, to the seller before any talk for mortgaging could begin. After the Great Depression, this was reduced to 20 per cent, opening up avenues for people to purchase properties.
Its obvious that to keep the monthly mortgage repayments low, a lesser amount needs to be paid off, not covered by the down payment, which means that the more the down payment, the less you’ll have to pay in monthly mortgage repayments.