Your Home Mortgage: How Interest Works

Buying a house is a big step in any family's life

, if for no other reason than due to the enormous financial commitment it represents. There is a steep barrier of entry with regard to coming up with a down payment, but the more you can put down, the lower your payments will be. You will also reduce the amount of interest you pay on the loan, which is something a lot of first time homebuyers don't fully understand. One of the most important things to know about the mortgage you're getting is that interest rate and how it will affect your repayment. Before you accept a loan, here's what you need to know.

Interest Rates

Lenders make money by charging borrowers interest on their loans. Bottom line interest rates for various industries are set federally, but every financial institution has a lot of room to play with when it comes to what they individually charge their customers. This rate will have a direct effect on how much you have to pay the bank each month for your loan. When it comes to a mortgage, you'll find two types of interest rates: fixed and adjustable. For fixed rates, the interest will never change. The rate you're paying today will remain static throughout the life of the loan. Adjustable rates usually stay low for a predetermined period and then go up over time. ARMs can be tempting, but they can also be dangerous for those who choose a loan that isn't well within their means.

Fluctuations

If you pay attention to national interest rate trends, you'll notice that they fluctuate quite a bit. Real estate experts and financial advisors always recommend that homebuyers attempt to get a mortgage when the interest rates are low. Lock in a fixed rate at that time and you'll enjoy lower payments even when the national averages soar. There are several factors that play into these fluctuations you see. The rate on federal funds has a big impact. You'll also notice that the stock market affects rates considerably. The price of U.S. treasuries and bonds also affects the rate of interest in the country.

Paying Interest

It is common knowledge that the vast majority of payments in the early years of a mortgage go towards the interest, with very little being applied against the principal. Lenders choose this schedule because many homeowners do not stay in a single home throughout the life of the loan. This enables the bank to make more profit off a loan. It is also an incentive for homeowners to stay put for a few years, rather than trying to flip quickly, which will not allow you to build up significant equity.

by: aayana

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