How a monthly mortgage works

Most people are now stuck with getting fixed rate mortgages with terms up to 30 years. The time of adjustable rate and other specialized home loan products is over. Today, FPO answers the question of what determines your monthly house payment. The first factor is your home loan amount. This amount will be some percentage of what you bought your house for, depending on how much money was paid down. A standard situation may look like this: A house was purchased for $125,000. The loan company required 20% of the house value to be paid immediately in the form of a down payment. This results in a loan amount of $100,000. With a term of 30 years, this amount will be paid at the end of the term as long as all payments are on time and there are no other changes to the loan. The loan contract will have interest on the amount borrowed from the bank, which is the reward for the bank risking it’s money   with you. Presently an interest rate of 3.5% is reasonable (and average). This rate will be compounded daily and payments made on the loan monthly.The monthly payment consists of money that is directed to service the interest on the debt and money that is paid towards the principle of the loan, reducing the amount currently being borrowed. For most all loans in the U.S., this monthly payments remains the same for the life of the loan.  Keep in mind that this does not include taxes, insurance, home owners’ association, or late fees; that’s extra.

Since the payment is the same for each month, the portion of money that is applied to the principle of the loan will subsequently   reduce the portion of the payment that covers interest for the next and each subsequent month. This process of repayment in called amortization.

About Steve @ FPO
Hello FPO readers, I have been writing on financial topics for about 12 years now, but I have only recently reignited the fire of publishing online. I have to say, its good to be back. I am an electrical engineer by trade who enjoys all topics engineering and financial. I started Financial Place Online (FPO) to create a value added financial news and education website that would provide a refreshing daily financial read. Financial Place Online websites are built around the principles of consumer empowerment, leveling the playing field, zero spam tolerance, and none of those annoying sidebar or banner ads. For us, it's all about enjoying a good read.

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