Blog Layout

How Interest Rates Work on a Mortgage

Ken Venick • Feb 11, 2020

One of the biggest purchases a homeowner will take is getting a home mortgage. When shopping for a mortgage, it’s helpful to understand how interest rates work. Here’s some information that explains what interest rates are and how they are applied in a mortgage.

What Is An Interest Rate?

Interest is calculated as a percentage of the mortgage amount. The longer you have to pay off your mortgage, the more interest you’ll pay over the lifetime of the loan. Interest can actually cost nearly as much as the mortgage over time.

Lenders charge interest rates based on the risk they are taking when issuing a loan. The riskier it seems to loan the money, the higher the interest rate. You’ll have to pay this back in addition to the mortgage. The total cost you have to pay, including interest, fees, and points, is called Annual Percentage Rate (APR).

Mortgage payments are structured so that interest is paid off sooner, with the bulk of mortgage payments in the first half of your mortgage term going toward interest. As the loan amortizes, more and more of the mortgage payment goes toward the principal and less toward its interest.

How Is Interest Applied in a Mortgage?

Fixed-Rate Mortgages

Fixed-rate mortgages are the most popular type of mortgage. Fixed-rate mortgages have a monthly payment that is the same for the entire life of the loan. The interest rate is locked in and does not change.

Loans have a repayment life span of 30 years; shorter lengths of 10, 15 or 20 years are also available. Shorter loans will have larger monthly payments that are offset by lower interest rates and lower overall cost.

Quick Facts:

  • If interest rates change, your mortgage payment won’t be affected. You know what your principal and interest payment will be for the term of the loan.
  • The interest rate may be higher than other types of loans.
  • Your monthly payment can change based on taxes and homeowner’s insurance.

Adjustable-Rate Mortgages

The interest rate for adjustable-rate mortgages are not locked in and will change over the life of the loan. Most ARMs have a limit on how much the interest rate may fluctuate, as well as how often it can be changed. When the rate goes up or down, the lender adjusts your monthly payment so that you’ll make equal payments until the next rate adjustment occurs.

Quick Facts:

  • All ARMs have periods that limit when the interest rate can change. The interest rate doesn’t change for the first period. This can range from 6 months to 10 years. After the first period, most ARMs adjust the interest rate from time to time.
  • Interest rate changes are based on the current market, so if the interest rate increases, your payment will increase.
  • All ARMs limit how much the interest rate changes over the life of your loan.

Interest-Only

With interest-only loans, you only have to pay the interest on the amount you have borrowed for the loan. After a set period of time the loan changes to a principal and interest loan. The principal is not reduced in the normal payments. The interest-only payment period is typically between 3 and 10 years.

The Bottom Line

It’s important to understand how interest rates work so you can calculate the cost of your debt. Knowing how much interest you are paying over time can help you to seek lower interest rates or pay off the debt at a faster rate.

By Ken Venick 27 Sep, 2021
Buying a home can be very intimidating and the no strings attached feeling renting can give someone sometimes seems like the easier option. But that isn’t always the case. There are many situations where it makes more sense to purchase your home instead of continuing to rent it year after year. There are alot of […] The post The Benefits of Buying A Home Over Renting appeared first on Owings Mills & Lutherville Mortgage.
By Ken Venick 15 Sep, 2021
Due to the pandemic, there have been a lot of people purchasing homes or even refinancing. It is important to understand the different types of loans that are offered to make sure the buyer knows their options.      Ken Venick has been in the mortgage loan business for over 30 years and is your […] The post Learning and Understanding The Different Types of Loans appeared first on Owings Mills & Lutherville Mortgage.
By Ken Venick 03 Sep, 2021
Find yourself wondering what a mortgage broker is? A mortgage broker acts as an intermediary between the borrower and the lender and controls transactions between the two. They take care of finding the best mortgages and interest rates by using their personal network of financial institutions and lenders.    Working with a mortgage broker is […] The post Understanding What A Mortgage Broker Does appeared first on Owings Mills & Lutherville Mortgage.
By Ken Venick 27 Aug, 2021
Just bought a fixer upper that needs a lot of work? A home renovation loan gives the homeowner the funds needed to not only purchase the home, but fix it up as well. A home renovation loan should only be considered if the renovation of the home will increase the property value or reduce long-term […] The post What is a Renovation Loan? appeared first on Owings Mills & Lutherville Mortgage.
By Ken Venick 20 Aug, 2021
Congratulations, you are looking to buy a new home! This is such an exciting time in your life, but it can also be an expensive one. When it comes to buying a home there will be plenty of hidden expenses you may not have taken into account when you decided to become a homeowner. It […] The post Hidden Expenses When Buying A Home appeared first on Owings Mills & Lutherville Mortgage.
By Ken Venick 13 Aug, 2021
The home buying process starts with figuring out the location of where you want to live. This can be extremely overwhelming with a lot of different scenarios to think about and a lot of decisions to make. Here at Ken Venick, we want to make the home buying process as easy as possible and that […] The post 5 Important Tips A Homeowner Should Know When Narrowing Down An Area To Live In appeared first on Owings Mills & Lutherville Mortgage.
By Ken Venick 06 Aug, 2021
On the road to buying a new home? Is your lender requiring you to have a co-signer in order to get your loan? We break down the requirements of a co-signer to give you a better understanding as to why you may need one in the first place.     A co-signer is someone (like […] The post Why Is Your Lender Requiring You To Have A Co-Signer? appeared first on Owings Mills & Lutherville Mortgage.
By Ken Venick 26 Jul, 2021
The Federal Reserve has said it will keep it’s interest rates close to zero, but it wont stay this way for long. Homeowners have been quick to put their houses on the market since more and more buyers are on the prowl are on the hunt for a new place to call home.      […] The post Money Moves To Make When Your Interest Rates Are Low appeared first on Owings Mills & Lutherville Mortgage.
By Ken Venick 19 Jul, 2021
Home renovations are one of the hottest topics in 2021. It gives an owner the chance to turn their space into exactly what they need it to be, whether they have just moved in, making more room, or getting ready to put it on the market. Home renovations can increase the value of a home […] The post 5 Home Renovations With The Highest and Lowest Returns appeared first on Owings Mills & Lutherville Mortgage.
By Ken Venick 29 Jun, 2021
It may take weeks, months, or even years to find your dream home. And one you find it, you want to do everything you can to secure it. There’s always the fear that someone else can snatch it up — which means you need to seal the deal with a competitive offer!    In this […] The post Top Ways To Show A Seller Your Offer Is Legit appeared first on Owings Mills & Lutherville Mortgage.
More Posts
Share by: