What is face value?
You’ve found the home of your dreams, and you think you can afford the asking price, but you’re just not sure how much you’ll really wind up paying. With the principal, interest, closing fees and other expenses to take into account, breaking down the total cost of a home loan can get pretty confusing.
As you start working your way through the mortgage process, it’s really important that you fully understand where your money is going. The only way to get the best deal possible on a mortgage is to first educate yourself on how home loans are calculated. For instance, one term you might come across is the “face value” of your loan. Let’s take a look at what this means for borrowers and what you need to know about face value.
Face value defined
When you hear “face value,” you probably think of buying concert tickets on secondary markets. That is, you’re not paying a mark-up on those tickets — you’re getting them at their original price. That same idea applies to financial vehicles. For instance, the face value of a stock is its original cost. Now, the face value of an asset won’t necessarily match its current market value, which is determined by a number of different factors. It doesn’t matter if you’re talking about concert tickets or tech company stocks, that same basic concept holds true with face value.
What is face value in real estate?
So, where does that leave face value as it relates to real estate? Well, it’s a little different, but only slightly so. The face value of a home loan refers to the principal of the mortgage — in other words, the total amount of your loan before adding in other costs.
Remember that your monthly mortgage payment includes more than just your principal. You’ll also need to pay interest, property taxes and homeowners insurance. So, while the face value of your loan is the amount of money your lender is extending to you, it does not calculate the total cost of your mortgage.
Face value has another (somewhat tangential) relationship with the real estate industry in the form of mortgage-backed securities (MBS). As we noted, face value is a common concept in the financial world, denoting the original cost of an investment vehicle — as opposed to its current market value. When applied to MBS, face value refers to the total outstanding principal of every mortgage bundled into that security. It does not account for the amount of interest that those securities are expected to generate over the long haul.
Why does face value matter for homebuyers?
Figuring out the total cost of a home loan can be tricky — that’s why it’s always a good idea to use a mortgage calculator to get an idea of how much you’ll wind up spending on a new house. While the face value won’t tell you exactly how much you’ll spend on your mortgage when it’s all said and done, that figure does have an enormous impact on your budget.
First of all, the principal of your loan will account for the bulk of your mortgage. As such, your largest expense when buying a house is the face value of the loan. Interest represents another big piece of your mortgage payment breakdown, but it’s not nearly as large as the principal.
When your homebuying journey is just getting underway, it’s important to realize that the face value of your loan reflects how much you’re able to spend on a new house. When you’re sitting down and creating a budget, you may not factor in housing costs like interest and property taxes. Rest assured, those expenses will be baked into your monthly mortgage payments. But at the outset of your home search, you’re most likely going to be laser focused on just figuring out what you can afford. That way, you can start narrowing down your options and zero in on the homes within your budget.
Face value also plays an important role in calculating those other expenses and, by extension, the total cost of your home loan. Lenders will use both the principal and the mortgage rate to figure out how much interest you owe each month. Then there’s your homeowners insurance. Borrowers with larger houses will almost certainly pay higher insurance premiums. And larger homes will have a higher face value. So, in general, more face value means more expensive insurance premiums.
How does face value impact refinancing?
Refinancing your mortgage can be a great way to reduce your housing costs over the long run. That’s especially true if interest rates have dropped since you first took out your mortgage. While property taxes and homeowners insurance premiums are unlikely to change after a refi, your interest absolutely will. As we said, the amount of interest you pay is based on your mortgage rate and the principal left on the loan. So, face value will determine how much interest you’ll owe each month after you refinance.
What can you do to lower your loan’s face value?
Beyond submitting a bid below asking price, there’s not much homebuyers can do to lower the initial face value of a house. On the other hand, making extra payments on your mortgage will help you pay down the principal faster than outlined in your amortization schedule. How much you stand to save in these scenarios can vary quite a bit depending on the terms of your financing and how much you put down each month. Use an extra payments calculator to figure out if putting more money toward your mortgage than required is worth the added expense.
Whether you’re on the hunt for a new house or simply want to refinance your mortgage, you may come across the term “face value.” Although more commonly used in other industries, face value is a concept you might want to be familiar with as a borrower. It’s essentially synonymous with the principal, so don’t be surprised if lenders or real estate agents use those terms interchangeably.
Creating a budget is one of the most important steps in the homebuying journey, so be sure you’re taking every housing cost into account. That way, you won’t overextend your finances or have to worry about your lender denying your loan application.