Mortgage rates can go by many names - interest rates, points, interest, or simply rates. However, it's all the same and that number could all mean the difference between tens of thousands of dollars in interest payments by the time you're done paying off your home loan.

To learn more about understanding mortgage interest rates and how knowing the way interest works can save you money, keep reading.

Low Interest Rates Are Good

The lower your interest rate, the better. Basically, the percentage that's advertised by a mortgage lender is the percent of the total loan amount owed that the lending company charges to charge you, and this amount is compounded monthly.

For example, a $250,000 mortgage with a 30 year mortgage term and a 7% interest rate would cost about $348,772 in interest by the time the mortgage was paid off. Meanwhile, that same mortgage with a 6% interest rate would cost only $289,595 in interest and save almost $60,000 over the course of the mortgage.

Adjustable Rate Mortgage vs Fixed Rate Mortgage

A fixed rate mortgage means that your interest rate is "locked in" and doesn't fluctuate over the course of the mortgage. So, if you take out your mortgage at 6.45%, your interest rate and your monthly payments will remain the same for the entire term of your loan. Because of that, homeowners ought to "lock" in when interest rates are low.

An adjustable rate mortgage is exactly what its name suggests, adjustable. With the changing market and fluctuating interest rates, the bank can adjust your interest rate to match. Usually, it's attached to what's called "prime" - that's a standard, reference interest rate used by banks and doesn't tend to fluctuate too much.

Borrowers who take a risk on an adjustable rate mortgage (ARM) tend to spend less money on interest than borrowers who opt for a conventional fixed rate mortgage. However, your fate is still linked to the market and current bank rates. So if you're not a risk taker, you may want to opt for a fixed rate option.

Principal Prepayments Lessen Interest Payments

As you delve into the world of home mortgages, you'll hear more people talking about principal prepayments and how they can save you money. But, what are they?

Well, any time you make an extra payment on your mortgage, whether it's monthly, yearly or as a one-time lump sum payment, you can specify that payment to go toward the principal of your loan, which will then decrease next month's interest amounts and help you make a bigger dent in your overall amount owed.

Filed under: Real Estate

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