Mortgages in the US: the different components that make up the final amount

Mortgage loans are medium or long-term credits —usually fixed in periods of 15 to 30 years—, destined to help people to acquire their homes., commercial premises or offices, as well as the construction of houses. This type of loan has the particularity that it is issued having as collateral, in case of non-payment of the corresponding monthly paymentsthe borrower’s property.

Nevertheless, The truth is that the amount of the loan is not the total amount of the mortgage, since there are other components that must be taken into account when calculating the final amount of the mortgage loan.

At SoloDinero we explain what are the components that make up the final amount of a mortgage loan.

How to determine the components of a mortgage?

Lenders issue mortgage loans based on criteria such as gross income, ability to pay monthly payments, percentage of debt to wages and additional earnings, and credit score.

The monthly payments of mortgage loans are composed, at all times, by two fundamental components: the principals and the interests.

The main part of the monthly payments is aimed at progressively reducing the balance of the loan. It is, in a nutshell, the loan payment itself.

Interest represents the cost of the mortgage loanand are defined by the interest rate established by the lender based on various financial indicators, such as the borrower’s credit history.

At the same time, the creditor can ask the borrower to open an escrow account (also known as an escrow account), for the payment of housing-related expenses, such as property taxes and mortgage and homeowners insurance premiums. This account is usually managed by the mortgage servicer.

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Basically, It will depend on the fixed term of the loan whether you pay more or less interest.

15-year loans typically have higher monthly paymentsbut, in the long run, you will end up paying less interest than with a 30-year loan, which have lower monthly payments but higher interest.

As an example, a mortgage loan of, for example, $300,000, fixed at 15 years with an interest rate of 3%, would generate interest of approximately $72,914.08 dollarswhich is almost 25% of the loan amount.

On the other hand, a mortgage loan of $300,000 fixed at 30 years with the same interest rate, that is, 3%, would imply an interest disbursement of $155,332.34that is, more than 50% of the loan.

However, in reality, these interest amounts are much higher, since currently the 30-year fixed mortgage rates are at 5.91%, while those of 15 years are at 5.18%. This is due to the recent increase in interest rates by 0.75% by the US Federal Reserve, one of the highest increases since 1994.

Other amounts must be added to these amounts. like closing costs —which implies the signing of the necessary documents to complete the mortgage transaction by all the parties involved— and down payments —which usually range between 3% and 20% of the total cost of housing—, in addition to other additional expenses such as mortgage insurance and the origination feewhich is the initial amount to process the credit.

Mortgage market trends in the United States

According to data compiled by the credit reporting company Experian, Total mortgage debt in the United States grew by 7.6%, reaching $10.3 trillion in total.

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In fact, mortgage loans are the majority of the debts of Americans.

The increase in debt resulting from mortgages goes hand in hand with a real estate market with rising prices and growing demand.

This has led to the belief that the US housing industry is in a bubble waiting to burst.

However this is not entirely true. Real estate market conditions are different from the financial crisis of 2008while interest rates have remained relatively low and the requirements for the approval of a mortgage loan have been strengthened over time.

Data provided by the credit firm Experian indicate, regarding the strictest standards for the issuance of credits, that the average credit score of a mortgage borrower is 756.

Housing prices seem, then, to be determined in a greater instance by the lack of supplyAs the pandemic and supply chain issues slowed the nation’s housing stock, it will take a while for supply to catch up with demand for prices to begin to decline.

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