Mortgage Interest Rate

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Jargon Buster -What is a Mortgage Interest Rate?

All too often people are bamboozled with jargon when they decide to purchase a home and need to find a mortgage. Whether you are a first time buyer or a seasoned property purchaser, it is difficult to come to terms with all the financial terms, abbreviations and acronyms. Probably the most important thing to understand when looking for the right mortgage lender is what a mortgage interest rate is.

Have you flicked through a magazine or a local newspaper recently? They're plastered with mortgage lenders advertising their mortgage interest rates:

  • FRM 6.0%
  • ARM 5.4 % etc etc.

But what does this all mean?

Let's focus on the percentage rate first. The percentage rate is the mortgage interest rate attached to the loan. They are often known as Annual Percentage Rates (APR) and are basically the yearly price of the money the lender will loan you against the property.

The easiest way to illustrate is with an example.

Mary wants to purchase an apartment for $75,000. She has a down payment of $25,000 but will need a mortgage loan to cover the remaining $50,000. The mortgage lender has helped her to select a mortgage with an APR of 6%.

As Mary will make monthly payments on the mortgage the monthly mortgage interest rate is:

6.0%/12 = 0.5%

50,000 x 0.5% = $250 dollars per month

Mary will need to pay $250 dollars a month in interest on the loan.

Every lender has differing mortgage interest rates as they all use varying indexes and have different margins. They also have a huge variation in their product ranges too. With so many choices available it is best to be well researched and spend time determining what the best product for you is. Seek expert advice from mortgage lenders and mortgage brokers.

In terms of mortgage interest rates, there is really only one choice to make; whether you will take out a Fixed Rate Mortgage (FRM) or an Adjustable Rate Mortgage (ARM). With an FRM you are guaranteed the same interest rate throughout the term of the loan. With an ARM the interest rate is variable and can go up or down. You need to decide whether you are ready to take the risk of an ARM with the hope that interest rates will decrease, or if you would prefer to have an FRM and always know what your monthly expenditure on your mortgage will be.