How to calculate mortgage loan interest rate
Mortgages can be one of your biggest worries when considering buying a home. Yes, you are getting a loan, but at what price? Well, that is where knowledge of how to estimate the mortgage loan interest rates is very useful. Here, you’ll learn everything in between that will enable you to determine the exact amount that you should pay.
Alright first, but what on earth is mortgage loan interest and why should we bother?
What is a Mortgage Loan?
A mortgage loan refers to any type of loan that has been created with the purpose of real estate purchase. In other words, you go to some financier like a bank and get a very large amount of money which you will have to pay back over some time with additional money known as interest for a home. The house is collateral – in other words, if you default on your payments, the lender can take your home.
Why Interest Rates Matter
Interest is a percentage that you pay on top of the money that you borrowed as a loan. It is another form of additional charge that the lender is allowed to levy on an amount that you must use to pay him or her back in a given period. The amount of interest that you obtain is an important factor when it comes to how much money the total payments for a loan will be. It may be just a few percentage points difference in their rates and this can easily translate into tens of thousands of differences in the total amount!
The Importance of Knowing Your Rate
This will let you know how much interest rate of your mortgage loan you should budget for, whether you are locking it in or planning to in the future. Secondly, knowledge of how your rate is computed can help you when dealing with your lenders.
Key Factors Affecting Mortgage Loan Interest Rates
Various elements define which of the factors lenders take into consideration when setting the rate of interest.
- Credit Score Influence
Now, credit score is like your financial identity – your performance in the economic world is assessed by it. This, they used to determine how likely you will be able to repay the loan. If the credit score is high, then chances are bright to get the interest rate as low as possible. But a low score? Be prepared for higher rates!
- Loan Term and Type
Your term, the length of your mortgage, and the type of mortgage will determine the interest rate. For instance, short-term loans will cost less than other loans and will have heftier monthly installments. On the other hand, they are paid at higher rates but are for longer terms, which most people find convenient.
- Loan-to-Value Ratio (LTV)
The loan-to-value ratio is the relationship between the amount that is to be borrowed and the value of the property concerned. Interest rates tend to go high when you borrow close to the property value to purchase the property. This means you get a better rate when you pay a more extensive down payment and hence lower your LTV.
- Economic Factors and Market Conditions
Very often mortgage rates depend on outside situations such as inflation, employment, and other issues related to the economy. Lenders also watch the Federal Reserve; it can change base rates used by the lending institution.
Simple vs. Compound Interest in Mortgages
Interest rates may be a simple rate or a compound rate. Here’s how they differ.
- Understanding Simple Interest
It is used only on the principal amount you are liable to pay or on the sum originally borrowed. Hence, if you have a $200,000 loan earning simple 5% interest, your interest costs would be $10,000 per year.
- What is Compound Interest?
Compound interest on the other hand is the interest on the original amount and also the interest. There are often different sorts of mortgages, of which simple interest is the most common type, but it is still useful to know more about compound interest if you are looking at other sorts of loans.
Tips to Secure a Lower Mortgage Loan Interest Rate
It is possible to negotiate for a lower interest rate, and you should do so if you wish to slash your fee by thousands!
- Improving Your Credit Score
The first step is enhancing the credit score. The other factors include making payments on time, paying off your debt, and not applying for any credit accounts when applying for a mortgage.
- Making a Larger Down Payment
Ideally, to lower your monthly payments and to put down the least amount possible upfront, your LTV ratio shrinks when you pay a higher down payment and lenders offer better rates for lower LTV’s ratios.
- Shortening Your Loan Term
Choose a small loan term if you can afford higher monthly installments. For instance, the interest rate of a normal 15-year mortgage will be lower than that of a 30-year mortgage.
