How is the mortgage loan fee made up?
Many times we pay our bills and we don’t really stop to think what we are paying. For example, the rent. Do you know how much corresponds to administration and how much to rent? Or, when you pay the administration of your depa, do you know what percentage corresponds to surveillance? A similar thing happens with mortgage loans. We pay them without knowing very well what they are charging us.
Many clients do not analyze payment schedules or how the mortgage loan installment is made up. Do you have your payment schedule at hand? All right. Let us begin.
The schedule tells a complete story. We know how much the credit amount is, how much you will pay for the credit, how long it will take you to pay and what other items you are paying in the monthly installment.
How do you set the value of your monthly fee?
The credit fee depends on three major factors:
- The amount requested as a loan;
- The term to be paid; Y
- The rate at which the financial institution will charge interest.
There is another factor that affects the final cost, but its value is lower:
- Lien and all risk insurance.
The first component of your fee is the fee
In your schedule you will always see two values.
The first, the TEA, is the Annual Effective Rate. It is equivalent to the value of money over time. The second value, TCEA, is the Annual Effective Cost Rate. This rate includes the cost of money and the cost of administrative work of the financial institution, for example, by mail the monthly statements. Normally, the TCEA is something like a point higher than the TEA.
If you want to make the calculation, you will see that the formula uses the value of the TCEA to calculate the value of the monthly installment of the credit.
All risk and relief insurance
In your payment schedule you can see the insurance status. In this example, the client negotiated joint relief insurance with an insurance company. The bank charged the study of the policy endorsement in the first month.
Also, we can see that all risk insurance will be contracted by the bank. A percentage equivalent to 0.2 will be applied and will be charged each month in the installment starting from installment number six.
In each column, your bank details the evolution that the credit will have month by month. For example, it shows the value of the installment, amortization, interest and balance.
- You will see that the monthly installment is equal to the interest plus the value of the amortization.
- Interest is the value you will pay the bank month by month for the credit.
- Amortization is the amount paid to capital, to the amount of the loan.
Initially, almost the entire value of the fee is used to pay interest and only a small part to pay the debt. About halfway through the total loan period, you will see that the opposite is true: your money is mostly destined to pay capital.
- The balance is the total value of what you owe to date. For example, if in the 100th month of your credit you want to pay the entire debt, look at the “balance” figure, that is the value you will have to pay.
Financial institutions cannot charge “commissions” on businesses they carry out with mortgage loans. They can charge you for insurance, insurance endorsements, the study of guarantees and the mailing of correspondence.
The last columns? You better stay in zeros. These are charges for non-compliance in the payment of monthly fees.