What Makes Up an Interest Rate?

When you purchase a home utilizing a mortgage, you won’t just be paying back the principal amount (the amount you borrowed) – you’ll be paying interest as well. There are several factors that determine how much you’ll pay in mortgage interest, which include the type, size and duration of your loan. Your down payment contribution will also be taken into consideration. Mortgage lenders typically finance 80% or more of the home’s price. You agree to pay this amount back with interest.

There are four parts to every mortgage payment: principal, interest, taxes and insurance. The principal is the amount you’ve borrowed that hasn’t yet been paid back and the interest is the cost of borrowing that money. The interest on the mortgage is determined by a percentage of the outstanding principal amount. It’s important to note that a mortgage payment will also include taxes and homeowner’s insurance too. These will vary depending on factors such as where you live and who your insurance provider is.

It’s typical to pay back a percentage of the amount you owe plus interest each month. You’ll be able to see your payment schedule month by month, broken down into principal and interest, provided to you by your lender. In the beginning, you’ll notice that your monthly payments most likely consist of more interest than principal. Once you start making more payments, you’ll see the interest decrease and principal increase on each payment. Depending on the type of loan you get, you’ll either pay a fixed rate each month or the change in interest rates will determine your payment. With fixed-rate mortgages, the interest rate never changes for the entirety of the loan. With adjustable-rate mortgages, however, the interest rate can change because it’s not locked. There are limits to how often and how high the interest rate can go up.

There are several factors that can affect your interest rate. These include your credit score, home location, home price and loan amount, down payment, loan term, interest rate type and loan type. Determining your interest rate will help set you up for success in the mortgage loan process. QCBN

By Greg Riordan

Greg Riordan is a loan officer with Legacy Mutual Mortgage. For additional information or to get in touch with Greg, visit legacymutual.com/officers/greg-riordan or call 928-427-5156. You can find his office at 325 W Gurley St #102, Prescott, AZ 86301. Greg cares about the people that choose to trust him with the biggest asset in their lives – their home. He will give straight, honest answers with exceptional advice whether you are refinancing your home to pay off debt, lowering your rate, reducing the length of your loan or to purchase your first or next dream home.