Interest rate: The amount of interest due per period, as a proportion of the amount borrowed.
Interest rate: The percentage of the loan amount that a homeowner must pay a bank as the cost for borrowing money. A mortgage can have a fixed or adjustable interest rate. The monthly payments for a homeowner’s mortgage are calculated using the interest rate terms in the mortgage contract. The interest rate is yearly, and differs according to the type of mortgage.
Interest Rate: The Hidden Cost of a Mortgage Loan
The cost of borrowing money from a bank is calculated as a percentage of the principal mortgage loan amount, called the interest rate.
The interest rate on a mortgage loan should not be confused with the APR (Annual Percentage Rate). Both appear as percentages in the mortgage terms, but the APR will reflect a higher number than the interest rate since the APR is a percentage of the entire cost of the mortgage, which includes the interest on the loan, in addition to other fees, such as discount points, closing costs, etc.
The mortgage type determines the type of interest rate a homeowner will be offered. If it’s a fixed rate mortgage, the rate will stay the same throughout the life of the loan. An adjustable rate mortgage, on the other hand, has a “floating” interest rate that increases or decreases, depending on a certain adjustment index that reflects market values.
The interest rate is determined by the bank, which takes into account a homeowner’s credit history, down payment, and housing market values. Government-backed loans are regulated by the FHA, which adjusts interest rates by placing limits and caps to protect homeowners, though the bank ultimately determines the rate.
“While low interest rates are like magic to the ears of prospective homebuyers, there are some possible repercussions which need to be kept in mind. When rates fall so significantly, people tend to jump at the chance to own a home, especially in today’s market when home values are at an all-time high,” says Craig I. Kelley, a Palm Beach attorney.
“Increased homeownership in and of itself is a wonderful thing, but what happens is that many people choose homes which they can barely afford or worse, cannot afford at all. These kinds of actions can prove detrimental if the market changes and the value of homes drop, in which case foreclosures are extremely common.”