Understanding Interest Rates

We hear so often about interest rates - good ones, bad ones, refinancing to get a lower interest rate. But what does it really mean? What impact does it have on the house you buy or don't?  Here's a quick overview to explain one of the most important factors of mortgage lending.

Interest is the amount it costs you, the buyer, to borrow money in the form of a mortgage.  Banks require a return on the amount of money you borrow.  Your monthly mortgage payment is made up of the principal (or loan itself), interest, insurance and taxes. The higher the interest rate - the more money you owe on your mortgage each month. That's why it's important to search for the best interest rate for your particular type of mortgage.

Interest rates are an annual figure. To calculate your monthly rate take the interest rate and divide it by 12.  This new number is the amount of interest you will pay on your loan per month.

Each month your interest payment decreases as you pay more towards the principal on your loan.  In order to keep your monthly payments the same banks use an amortization schedule which applies more money to your principal and less money to interest each month.  Banks can provide you a full amortization schedule upon request.

Currently interest rates are at historic lows. This means that borrowing money for a home is more affordable than it has been in years. Take a look at the graph below for an idea on how far interest rates have come and why now is a great time to buy!