Our Blog


The Basics Of Mortgage Interest Rates And How They Work

For the vast majority of people, buying a home means getting some form of long term financing. Due to the numerous economic problems that the world is facing today, a lot of people might not have the capacity to buy homes in cash. It is for this reason that mortgages have become very popular over the past few years. In fact, it has become routine in some countries for individuals to have applied for a mortgage at at least one point in their lives.

If you are considering applying for one, it is critical that you understand the issues to do with interest and how it will be charged in your circumstances. Most of the lenders out there have different interest regimens, and it’s important that you have the basic information about how this works before you can apply for any of their products. Understanding the interest will also help you negotiate, something that has become very common for potential homeowners to do. In such cases, you can’t afford to make decisions based on very shaky knowledge. The basic types of mortgage loans you are likely to come across anywhere in the world include:

The fixed interest mortgage

This is an interest rate that remains static for the life of the mortgage. This means that the mortgage payment is distributed evenly over the life of the mortgage as is the principal amount. However, it also makes use of the front loading concept. This basically means that though you will pay an equal sum of money every month until you are done paying the mortgage, the first few months of payment will be directed to the interest. Most people prefer the 30 year fixed rate mortgage, simply because it means that each monthly payment will be low.

The adjustable rate mortgage

In this type of mortgage, the interest changes every year. The change is normally dictated by various parameters including the central bank lending rate, as well as other economic indicators. The beauty of this is that if the economic indicators favor lending, the interest rate will be lowered, and this means that the borrower might end up spending less than anticipated on the mortgage. Some lenders will have caps on mortgage adjustment in order to protect themselves and the borrower from wild fluctuations. These types of mortgages are most ideal in an environment where interest rates are very high, to the point of seeming unsustainable.

The interest-only mortgage

This is a type of mortgage that allows the borrower to pay only the interest for the first few months. This has the effect of minimizing the amount of money that they have to pay for the mortgage each month, at least initially. This type of mortgage is most ideal for people who might be interested in buying a home, and who expect that their income will increase with time.

For instance, if you are just out of college and have a decent job, you can be relatively sure that you will get a few promotions and other sources of income in future. Investing in this type of mortgage will allow you to own your own home without having to commit to heavy payments during a time of your life when you are just starting out your career.

Other lenders might have other interest schemes in addition to the above. When you are out there applying for one, you should always make a point of understanding exactly what the implication of any interest regime you want will be. Only them should you sign the papers. This way, you will be less likely to make mistakes you can’t afford.