Mortgage Payment

What is APR and how is it calculated?

The annual percentage rate (APR) is a calculated rate of interest for a loan over its projected life. This rate includes the interest, all points (which are considered prepaid interest), Mortgage insurance, and other charges associated with making the loan that the lender collects from the borrower.

The APR is calculated by a standard formula that all lenders use. This enables the borrower to comparison-shop between lenders and/or loan products.

What is a good-faith estimate?

Your lender or loan agent must provide you with a good-faith estimate within three days of your application. This is the information you need to make a fair and accurate judgment when shopping for a loan.

Your estimate is a written document that shows all the costs that can be estimated in advance by the lender. You need this information so there are no surprises on the day you close your sale on the property to be purchased. You will be expected to pay closing costs.

What does my monthly mortgage payment include?

The bulk of your monthly mortgage payment goes toward paying off the principal and interest of your loan. In addition, most lenders require that you pay a sufficient amount to cover your local real estate tax, plus your homeowner's or hazard insurance. This amount is placed in an escrow account, from which your lender then pays your tax and insurance bills as they come due.

Can I pay off my loan early?

If you can afford it, and are interested in the considerable advantages of having more equity and/or owning your home free-and-clear at the earliest possible date, the answer in most cases is yes. Earlier in this section, "How to Pay off a 30-Year Mortgage in 15 Years Without Really Feeling It" -- outlines a popular formula for pre-payment.

The FHA, VA, and even some states do not allow lenders to charge penalties for paying mortgages early or refinancing. In fact, many lenders now include space on monthly statements for borrowers to itemize an additional principal payment they wish to include with their regular payment.

If you're unsure about the rules governing pre-payment, review your loan agreement.

What are the respective advantages of 15-year and 30-year loans?

The 30-year fixed-rate mortgage remains the standard mortgage, with an array of valuable benefits designed especially for buyers who expect to stay in their homes for a long time. Because the borrower pays more interest than principal for the first 23 years, the tax deduction is substantial. And as inflation causes both living expenses and income to increase, your unchanging monthly mortgage payments account for a relatively smaller portion of income as the years go by.

As you'd expect, a 15-year monthly mortgage means higher monthly payments than an equivalent 30-year loan...but not as much higher as you may think. At the same rate of interest, payments on the 15-year mortgage are roughly 20-25 percent higher than a loan that takes twice as long to pay off. And one of the benefits of choosing a 15-year mortgage is that you can generally get a lower interest rate for an otherwise similar loan. Another advantage is faster equity build-up because a larger portion of your early payments is going to pay off principal. This makes the 15-year mortgage an ideal alternative for couples approaching retirement or anyone else interested in owning their home free-and-clear as quickly as possible.


Consider paying the points for the better rate if you can afford it, especially if you plan on keeping the home for more than a few years. Like interest, the money you pay for points may be tax-deductible, and the investment may pay for itself through savings generated by lower monthly payments.

Do adjustable-rate mortgages offer any protection against rising rates?

Yes. ARMs and other variable-rate-of-payment plans offer lower-than-market interest rates initially, but because they are tied to the interest rates of U.S. Treasury Bills or other indexes, interest rates later in the loan term may rise. However, many such loans offer built-in safeguards designed to minimize the effect of any rapid escalation in interest rates.

One such safeguard is the rate cap. Many ARMs include provisions for the maximum amount your rate can rise, both annually and over the life of the loan. For example, if your initial rate is 6.5 percent, the loan may include one-percent annual and five-percent lifetime caps...which means even if rates rise dramatically, you'll pay no more than 7.5 percent next year, 8.5 percent the following year and so on, until a maximum rate of 11.5 percent is reached.

An ARM may also allow your rate to decrease when the index it is tied to goes down. As you might expect, decreases are usually capped as well.

A second protective device included in some ARMs is the payment cap. Under this provision, your monthly payments may rise by only a set dollar amount. The potential disadvantage of this type of cap is that it can slow or even reverse your equity build-up. If rates rise dramatically, you could actually wind up owing more principal at the end of the year than you did at the beginning.

Of course, ARM holders can also consider refinancing to a fixed-rate loan after a few years. Some ARMs even include a provision for converting to a fixed-rate loan after a set period of time.

What can I do if I have a fixed-rate loan and interest rates go down?

When interest rates drop significantly as they have in recent times, the homeowner should investigate the financial advantages of refinancing. Essentially, this means taking out a new loan to pay off your existing loan.

Refinancing may require paying many of the same fees paid at the original closing, plus origination fees. Most mortgage experts agree that if you can get a rate two percent less than your existing loan, and you plan on staying in your home for at least 18 months more, refinancing is a good investment.

What is the difference between pre-qualifying and pre-approval?

A pre-qualification consists of a discussion between you and a loan officer. The loan officer will collect information regarding your income, monthly debts, credit history and assets, and based on this information calculate an estimated mortgage amount for which you qualify. The pre-qualification is not a mortgage approval, but more an estimate on what you can afford.

A pre-approval, on the other hand, is a more comprehensive approach giving an actual decision on a home loan. With ERA Mortgage, a credit report is ordered electronically and is received within 30-60 seconds. This is an actual credit approval and it carries with it some considerable benefits. From this information, a loan approval is given agreeing to finance a home and specifying the total mortgage amount available to you.

What could be more comforting than the peace of mind that goes with knowing that your mortgage is fully approved?

You will have a greatly improved negotiating position when you are pre-approved for a mortgage. Sellers are more apt to negotiate with someone who already has a mortgage approval in hand. The pre-approval letter lets the seller know they are working with a serious cash buyer. A pre-approved buyer can also close on a property more quickly -- another major consideration for a motivated seller. We strongly recommend it.


Save some extra money every month. With the interest you earn on savings you may be able to make an extra payment at the end of the year.

Pay an extra twelfth of your principal and interest payment every month.

Send whatever extra you can every month.

Whichever method you choose, be sure to clearly indicate that the excess payment is to be applied to principal.

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