A home mortgage is simply a collateralized that you have received to enable you to purchase your Louisville area home. With it comes substantial responsibility. You’ve received tens of thousands, or perhaps hundreds of thousands of dollars from a lender. When the loan term is close to ending, a little bit of knowledge can go a long way. Understanding four key elements of your mortgage can help you to make the best decision possible when you either renew or refinance your mortgage.
The principal is the amount of money that your lender provided toward the purchase of the home. Every month, the mortgage payment that you make includes some amount that goes toward reducing the principal, or the balance, remaining on your mortgage.
Interest is basically the compensation the lender receives for providing you with “principal” upfront. Whatever the interest rate may be, you’re only paying interest on the remaining balance. Therefore, with each additional payment remitted, the amount of interest that you are paying decreases as the remaining principal also decreases.
When it comes time to renew or refinance a mortgage, every homeowner has the same goal: to get the lowest interest rate possible. Some extra effort here can mean hundreds, or even thousands of dollars remaining in your pocket rather than going to a lender. A strong credit rating, including an excellent payment history on your mortgage, will go a long way toward getting you the best interest rate possible. If your credit is not ideal, and someone in the family can be a guarantor on the loan, this added step can help to secure a lower interest rate as well.
There are both fixed-rate mortgages and variable-rate mortgages. Getting good professional advice on which is best for you is imperative. However, in general, if you’re fairly certain that you will only be in your home for a certain number of years, taking advantage of a lower variable rate can be useful. For example, if the rate on a variable mortgage will not adjust for five years, and you know that you’re leaving in just four years, then there’s little risk in signing up for a variable-rate loan.
In many instances, a home’s property taxes are rolled into the mortgage payments. This “pay-as-you-go” approach to property taxes is very safe. Property taxes are typically paid just twice a year to your municipality. If you pay these taxes with your mortgage payment, the lender merely forwards the money to the local government entity when the taxes come due. Therefore, you’re essentially paying “early” much of the time. If you’re absolutely certain that you’ll have no problem raising the funds to pay your property taxes on time, then not including the taxes in your monthly mortgage payment allows you to keep a little more of your money in your pocket for a little longer time.
The most common type of insurance included in the monthly mortgage payment is private mortgage insurance (PMI). This insurance helps to protect the lender, and it is often a prerequisite to getting a loan approval. However, especially as time goes on, and the equity in your property grows, the need for private mortgage insurance may no longer remain. Again, sound professional advice before you renew your mortgage is important. Many homeowners ultimately pay private mortgage insurance when it is no longer really necessary. In other words, they simply have a wasted expense.
Finally, homeowners insurance covers the structure as well as its contents. It also provides liability protection to save you expense if someone was to slip on your sidewalk, for example. Again, the premium for this homeowners insurance is sometimes included in the monthly mortgage payment, but not always.
Understanding what goes into your Louisville KY mortgage payment can go along way to helping you to find the best terms and the best approach when your mortgage comes up for renewal. This knowledge will also help you to understand when it may be time to refinance. Given the size of the typical mortgage loan, even a slight decrease in interest rates can mean a lot of money that stays in your pocket every year. As with any other ongoing expense, you don’t want to be overpaying for your mortgage loan.