When it comes to the overall cost of your loan, there are two major components: principal and interest.
When it comes to the overall cost of your loan, there are two major components:
The Principal – The total sum you borrow.
The Interest – The percentage of the total sum you borrow that you pay for the privilege of borrowing.
Over the lifespan of a typical 30-year mortgage, you can potentially pay more in interest than you pay in principal. Crazy, right? Because this is the case, your interest rate can have a huge impact on the actual cost of your home. To help you get a better grasp on how this works, lets break it down.
How Interest Drives Up Your Payments
In most cases, mortgages with higher interest rates have higher monthly payments and require you to spend more money over the lifespan of your loan. For instance, the monthly payment on a $300,000 30-year-fixed mortgage with a 3.5 percent interest rate would be $1,347.13.
The monthly payment for the same loan with a 5.5 percent interest rate would be $1,703.37. That’s more than a $300 difference each month and more than $100k over the lifespan of the loan.
Amortization Terms
One of the ways to pay less interest is to borrow for a shorter amount of time. This “amount of time” is known as the amortization period (aka your loan’s lifespan). Shorter mortgages, such as a 15-year-fixed, let you pay your loan off more quickly. Your monthly payment will be significantly larger than a loan with a longer amortization period, but you’ll also typically receive a lower interest rate.
ARM
Up until now, we’ve pretty exclusively discussed fixed-rate mortgages. This means you’ll have the same interest rate for the entire duration of your loan. However, with an adjustable rate mortgage (ARM), your interest rate can fluctuate. In most cases, an ARM will be fixed for a set period of time. During that initial period, your payment may be low and manageable. But once the ARM is up, the size of your monthly payment may be unpredictable.
Have additional questions about interest rates? Contact one of our loan officers today.
