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What is mortgage interest?

By: Movement Staff
September 10, 2019

Learn how mortgage interest is calculated

If you've ever financed anything with a loan, you've probably heard the term 'interest' before. But if you're looking into financing a home, you might be wondering what the differences are with mortgage interest and how they apply. After all, this is probably the biggest purchase you've had to consider interest for. So what is mortgage interest and what do you need to know? This ABCs of Mortgage is ready to serve you mortgage interest explained. 

 

What is mortgage interest?

We talk a lot about interest rates, but what about the interest itself? Borrowing money to buy a home isn't like asking your parents for 20 bucks to buy a shirt. When you buy a home, you're borrowing a lot of money from a bank or lender. And they charge you to do that (sorry, don't shoot the messenger 😅). The longer you have your loan, the cheaper the monthly payments would be, as they'd be spread out over a longer period of time. However, the more you'll end up paying in interest in the long run.

 

Mortgage interest explained

Mortgage interest is a similar concept to interest for any other item you may have financed before. The interest is an additional cost to the lender for them lending you the lump sum to purchase your home. It gets bundled into your monthly mortgage payment, so you won't have to worry about tracking down where to make an additional payment. 

 

When the rate is determined for your mortgage interest, it will remain so throughout your loan term (the period of the loan), as long as it is a fixed rate and not a variable. So whether you decide to go with paying it back in 15 years or 30, your rate should stay the same throughout that time. But note that you could save up to 10's of thousands of dollars by paying it back in a shorter amount of time.

 

mortgage interest explained

How mortgage interest is calculated

According to Finder, there are a few items that will affect how your mortgage interest is calculated. These factors include:

      • The overall loan amount
      • Credit score
      • Federal funds rate
      • Loan product type

All of these items will play into what your final interest rate will be. And ultimately, what your monthly payment will end up being.

 

That helps – what now?

You'll need to make sure you connect with a local loan officer to see, first and foremost, what loan type is going to suit you best. From there, you'll also be able to analyze your financial situation to see what your interest rate could be. If your credit score is impacting it to be higher than you'd care for, they should be able to point you to resources to help with credit repair. Once you're in a comfortable range of your budget, they'll be able to walk you through the rest of the home financing journey.

 

Buying a home requires a commitment to your financial health. Especially if you expect your interest rate to be an amount you're comfortable paying on a monthly basis. Make sure you understand what your credit looks like and that you're in the know of all you're signing up for. Don't feel like you have to do this alone or be in the dark. The ABCs of Mortgage is here to ensure you're on top of your game when you decide to proceed with the path toward homeownership.


Speak to a local loan officer. 

Author: Movement Staff

The Market Update is a weekly commentary compiled by a group of Movement Mortgage capital markets analysts with decades of combined expertise in the financial field. Movement's staff helps take complicated economic topics and turn them into a useful, easy to understand analysis to help you make the best decisions for your financial future.

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