Mortgage Interest Explained

House key cut in dollar sign shape
A low mortgage interest rate is your key to home ownership.

Mortgage interest is the price you pay for borrowing money from a lender to purchase or refinance a home. Anytime you get a loan from a bank, you are required to pay interest on the money you borrow. The amount of interest you pay is known as the rate and is a percentage of the total amount lent to you. Interest rates vary depending on the type of loan you get, the lender you get it from, and your credit history.

The Impact of Interest

Mortgage interest applies to loans that have been used to purchase or refinance a home. In most cases, you will end up spending as much in interest as you do for the actual purchase of a home. For example, if you borrow $120,000 over 30 years, and the interest rate is 7%, you will end up pay $167,000 in interest alone.

When you break down the amount of interest you pay, as in the example shown above, the amount can seem downright obscene, but that's the price you pay for borrowing such a large sum of money over such a long period of time.

Use the mortgage calculator below to see how big of an impact interest rates can have on your monthly payment and total amount you pay over the life of the loan.

Types of Mortgage Interest Rates

Lenders offer an endless amount of mortgage programs to choose from. You can get 30 year mortgages, 15 year mortgages, interest only loans, reverse mortgages, etc.

Regardless of the mortgage program you choose, you will have two basic options when it comes to interest rates: a fixed rate or an adjustable rate.

Fixed Rate Mortgages

Fixed rates are typically available with loans that have 15 or 30 year terms. As the name suggests, these rates are fixed. The rate will be the same from the beginning of the loan to the end. This means that your monthly payment will never fluctuate. While there are many benefits to getting a fixed rate mortgage, there is also the possibility that interest rates may drop a few years after you get the loan. If this happens, and you are unable to refinance, you could be stuck paying a higher rate than you would have to if you had an adjustable rate mortgage.

Adjustable Rate Mortgages

Adjustable rate mortgages (ARMs) are typically available with any type of mortgage loan. Unlike a fixed rate mortgage, an adjustable rate mortgage has a fluctuating interest rate throughout the life of the loan. This means that your mortgage payments are constantly changing. In most cases, you will pay less interest with an adjustable rate mortgage than you would with a fixed rate mortgage-at the beginning of the loan. If average interest rates rise, so will your adjustable rate mortgage. The danger of this is that you may not be able to pay your monthly payments if rates get too high.

Getting the Best Rate

The mortgage interest rate you pay will vary depending on the type of rate you get, the lender you work with, and more than anything else, your credit history. If you have a good credit score, you will be eligible for better rates. On the other hand, if you have a bad credit score, you will pay higher rates.

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Mortgage Interest Explained