How To Calculate The Mortgage Loan Amount?

How To Calculate The Mortgage Loan Amount?


Most of the loan seekers need a loan offer that is available at the lowest possible interest rates so that they can repay the amount in given time with little difficulty. While we all like to judge the offers by the percentage of interests, very few among us have a clear idea about how the mortgage rates are determined. Even well-educated people face inadequacy in understanding the complexities of financial calculations, thereby one is likely to make an uninformed decision and thus fall into soup.

The financing institutions, however, are aware of the technicalities and thus miss no chance to charge you an interest rate that works in their benefits. We bring here a few key concepts that play a dominant role in determining your mortgage interest rates.

Home Pricing and the Loan Amount

How much do you need to buy a house? Say you have some money in hand and you are applying for a loan. You can make a rough calculation beforehand to avoid any confusion. Here’s how it’s to be done. The amount you need to borrow as mortgage loan is equal to the home price minus the down payment. In most of the cases, you have to pay a higher interest rate on the calculated loan amount if you intend to take a comparatively small or a relatively large loan.

How to find the Approximate Value of the House?

I guess after you begin hunting for the houses, like meeting the real estate agents and talking to the property owner, you can have a rough idea about the amount you should be asking for the loan. Even if you haven’t begun doing that, you can do some research right now and search the price range at relevant real estate websites so that you can have a figure in your head.

Down Payment

We already have a formula for evaluating the loan amount. Adding to it is the amount you consent to pay as the down payment. A lower interest rate is incurred if you make a higher down payment. Because the lenders (banks or financing institutions) sense a low risk when you as a party have invested the larger portion in the property deal, you get to pay only an appreciably lower interest rate. Conversely when you pay a low amount as the down payment, the lender has more to risk, therefore, increases your mortgage loan interest rate.

Loan Term and Type

Several types of loan rates are available on the market. Say for FHA, and VA loans, the interest rates will be different. So you can know more about these loans from your nearest loan-providing institution to decide which type works better for you.

The term of the loan is the time duration within which you promise the lender to repay the loan amount. When the term of the loan is longer, you should expect a higher interest rates. But you will have to pay less monthly installments (what a relief, isn’t it?).

However, if the loan period is shorter, you get to have a marginally lower interest rates, and the overall costs are also lesser than the long-term loans. However, you will need to pay a higher EMI to avail this type of loan.