The monthly mortgage payment mainly pays off principal and interest. But most lenders also include local real estate taxes, homeowner’s insurance, and mortgage insurance (if applicable).
The amount of the down payment, the size of the mortgage loan, the interest rate, the length of the repayment term and payment schedule will all affect the size of your mortgage payment.
Your loan-to-value ratio (ltv) expresses the equity in the property. Your equity is basically the amount of the property you own, expressed as a monetary figure. Another way of thinking of your equity is that it’s the amount of money you’d receive if you sold your property at its valued price, less what you’d have to return to your lender to repay the loan. Example: $100,000 value minus $50,000 to repay loan = $50,000 equity. Your ltv and equity are crucial because the higher the ltv (and the lower the equity), the less value there is to pay off the loan if the borrower defaults. Thus, low equity loans present lenders with greater risk, forcing them to increase their costs.
The “term” of a loan is the period of time you will spend repaying it. The most common loan term is 30 years, but other options are also available. A 40-year term is available for customers who want lower monthly payments than those available from a 30- year term. There are also 20-, 15- and 10-year mortgages for those who want to repay their loan faster.
Whether you’d be better off with a longer loan term or a shorter one depends on a number of factors, most notably your monthly income and long-term financial goals.
Longer mortgage terms usually feature lower monthly payments, and can be a good option if you’re on a tight budget or would prefer to direct your monthly cash flow toward other investments or expenses.
Shorter mortgage terms mean higher monthly payments, but allow you to repay the loan faster and can reduce how much you spend on interest.