Interest rates affect us every day, from how much we pay on credit card balances to how our savings accounts grow. For home buyers, mortgage loan interest on their homes is a big consideration.
Interest affects your mortgage payments in a big way — and not understanding how it works can negatively impact your path to home ownership. Here’s what you need to know about mortgage interest and how it can affect your next home.
What is Mortgage Interest?
Also known as a “finance charge,” mortgage interest is the amount homeowners pay to their lenders to borrow money. During the mortgage process and after closing, your mortgage interest rate will be represented as a percentage of your loan.
Interest is calculated monthly and incorporated into your payment. You can use the mortgage calculator on the SESLOC website to estimate how a conventional mortgage or Adjustable-Rate mortgage works, including your monthly payment, how much is dedicated to interest, and your amortization schedule.
Fixed-Rate and Adjustable-Rate: What’s the Difference?
How you will pay interest is based on which type of mortgage you have: A fixed-rate mortgage or an adjustable-rate mortgage. Each type affects your amortization schedule – and potentially how much you pay each month.
If you have a fixed-rate mortgage, your interest payment will be calculated as part of your regular monthly payment based on your amortization schedule. As the name suggests, your interest rate won’t change throughout the length of the loan, keeping your payment stable month-to-month.
With an adjustable-rate mortgage or ARM, your interest payment may vary depending on the terms of your loan. While the payment and interest rate may be fixed for the first five, seven, or 10 years, the adjusted period is when the interest rate changes based on market conditions. While your payment is still based on an amortization schedule, it could increase or decrease after each adjustment period, usually every 6 months. The good news is that ARM loans typically have a rate cap, ensuring that interest rates can’t go over a certain threshold both semi-annually and throughout the life of the loan.
How is Your Mortgage Interest Rate Determined?
The interest rate you will pay on your mortgage is determined by several factors. While some are in your direct control, others are based on market conditions.
Your personal finances will play a major role in determining your interest rates. Lenders will consider your credit history, credit score, your debt-to-income ratio, and down payment as part of your risk profile. If you have a good credit score, positive credit history, and low debt-to-income ratio, you may qualify for a better rate because these are indicators that you are highly likely to pay your loan on time every time. The opposite is also true: While it could be possible to qualify for a mortgage with a lower credit score, your interest rate may be comparatively higher. Talk to a Mortgage Loan Officer to get the full picture of what you may qualify for based on your budget and credit history.
External factors can also affect your final interest rate. These include the federal funds rate (the “Fed Rate”), borrowing guidelines set by different federal programs and the housing market all have an underlying effect on consumer interest rates, which can set the trends for your interest payment.
Talk to a Mortgage Loan Officer to Learn More About Interest Rates
Although there is no “one size fits all” solution for mortgages, understanding how mortgage interest works and how it can apply to your situation can give you an advantage in getting closer to opening the door of your next home. Working with a Mortgage Loan Officer is the next step to bringing together your home ownership dreams.
The Mortgage Loan Officers at SESLOC Credit Union are knowledgeable and are here to help you get the financing you need for your next home. Contact your MLO today and get started on putting together the pieces for your home ownership plan.