Today, many people are checking into interest mortgage rates without understand where it comes from, or how it works. There are many mortgage rates to consider when look into a loan. For illustration purposes, we will use $1,000 throughout this article.
1. What is Principal?
- Principal is the original amount mortgage refinancing money that borrowed. It is the total sum of money that a person owed as debt.
2. What is Interest?
- Interest is a fee that you pay for using borrowed money. Sort of like a compensation for the lender. Lets say that you borrow $1,000 at a 10 percent interest rate per year; your pay back to the lender will be $1,100.
3. What is a Point?
- A point is a fee (prepaid interest) that the lender or bank charge for doing the mortgage loan. A point is equal to 1% of the loan amount. So for $1,000 mortgage, one point will be $10. Two points will be $20, so on and so forth.
4. What is APR?
- We see the term APR all the time on mortgage rates and credit cards. The term "APR" stands for "Annual Percentage Rate." With a mortgage, the APR usually includes the principal, interest, and points.
5. A balance between Points and APR?
- Mortgage lenders already have a set amount of money to make in mind when doing loans. Borrower will have to pay for that set amount one way or the other. For example, if a person pays NO Points, then the APR will be higher.
- On the other hand, if a person pays Higher Points, then the APR will be lower. In this case, the borrower simply "buys down" or "prepaid" the interest in advance with points.
6. What determines mortgage rates?
- There are many factors that determine mortgage rates, such as: loan amount, down payment, job history, length of loan, inflation and credit worthiness. A lender will have to look at all areas to determine the rate. It all comes down to the likelihood of the borrower for paying back the loan.
7. What is a fixed rate mortgage?
- The payment and mortgage interest rate is fixed for the life of the loan. For example:
- 30 year fix loan of $1,000 at 10% rate will be $9 per month.
- 15 year fix loan of $1,000 at 10% rate will be $11 per month.
8. What is an adjustable rate mortgage?
- Adjustable Rate Mortgage (ARMs) has lower rate in the beginning and higher rate later. The duration of this "lower" rate is based on the loan that a person gets into. The "lower" rate can be fixed for first few years, adjusted yearly, or based on the index rate.
9. What does the FED got to do with it?
- The central bank of U. S. or the Federal Reserve (FED) determines the interest rate. By adjusting the interest rate, the FED can bring economic stability, growth, inflation, or recession. Every time when the rate is adjusted, it will have an impact on a person's affordability of housing.
There are many more areas that will determine mortgage rates. These are just some of the simple refinancing mortgage for understanding how it works. Before signing any loan document, always shop around. Make sure that you understand what you are getting into. There are many fine print lines and fees that lenders or loan originators charge that may not be beneficial to the borrower. Don't be afraid to ask questions and don't get into a situation that you will regret later.
About the Author:
Howard W. is the CEO of Realty Inner Circle, a free service website to provide mortgage rates, insights and tips in real estate. He has knowledge of asset protection, short sale, foreclosure, finance, insurance, and landlord / tenant relationships. Howard has personally bought and sold realty for years.
Website: http://www.realtyinnercircle.com/
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