Lately there have been quite a few news releases stating that mortgage rates are the lowest they have been in years. This is great news to those looking to borrow to buy a house, but for many people this news simply does not mean anything. Mortgage rates are simply something they have never even thought of, but now if they are considering purchasing a house they feel they need to know what to look for, and understand how the rate is calculated.
Simply put the mortgage rate is the amount the borrower will be charged in interest annually. This might make one think that if they borrow $100,000 at a 4% interest rate they will owe $4,000 in interest alone. This would be true if they never paid anything toward principle on their loan. However, most loans have both principle and interest built in, so in reality the formula is a bit more complex. Each month they will be charged the equivalent of their annual interest rate, divided by twelve. In our example it would be about .33% or about $330. Since a portion of their payment went toward paying on the principal the next month the interest will be charged on slightly less than $100,000. So the amount put toward interest goes down each month. Since the payment remains the same on the loan, each subsequent payment goes to putting a little more toward principal and a little less toward interest.
The actual calculation of the rate is fairly complex. There are a number of changing variables, and for the most part the borrower does not need to worry too much about it. The important thing for the borrower to remember is that the lower the interest rate, the less they will pay in the long run. In fact, the easiest way to see this is to use a mortgage calculator, to see the hard numbers.
Shopping for a mortgage can be quite the process. What the potential borrower needs to keep in mind is that the lower the interest, the lower their payment. But not all loans are created equal. There are some that may not fit their situation (the 5/1 ARM, for example, is not a good loan for everyone). Low rates are great, but the low rate can be offset by high closing costs. Obtaining a number of quotes can help to provide ammunition for negotiation. Do not be afraid to walk away, and keep looking. Mortgage rates are indeed currently at a record low. If you are in the market, now is the time to get your loan.
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