Understanding Interest Rates

Buying a home is the largest financial decision many make in their life. So understanding how home mortgages work, specifically in regards to interest rates, is something we take very seriously at West Coast Mortgage Group. We know that knowledge and understanding leads to confident decision making, and that is where we want to position our clients when it’s time to purchase a home.

Understanding what interest rates are, and how they work is an important step when making a decision on a home mortgage.

What is a mortgage Interest rate?
When you apply for a mortgage loan, the risk of that loan is being taken on by the lender who is usually paying a large sum of money towards your home purchase. Lenders charge interest on the amount you borrow, which the homeowner pays back in addition to the mortgage. To break that down even further, every month a borrower will pay back a portion of the amount borrowed (that is called the principal), plus the interest accrued for the month (which depends on the interest rate). The longer you have to pay off your mortgage, the more interest you’ll pay over the lifespan of your loan.

There are two types of interest rates:
Adjustable Rate: Interest rate will change under defined conditions
Fixed Rate: Interest rate does not change

What is an Adjustable Rate?
This interest rate is not locked in and fluctuates during the life of the loan. When the rates change, lenders recalculate monthly payments so that the borrower is making equal payments until the next rate adjustment occurs. It is important to know that most adjustable rates have a limit or cap on how much the rate may fluctuate, as well as how often it can be changed. An adjustable rate can also be referred to as an adjustable rate mortgage (ARM).

What is a Fixed Rate?
As the name of this rate suggests, a fixed rate remains the same for the life of this loan. Once the rate is locked in, it will not be adjusted. Depending on the length of the loan you are interested in, shorter loans with larger principal payments, tend to have lower interest rates and can lead to lower overall costs.

At West Coast Mortgage Group, educating our borrowers is very important to us. There are additional important variables to a mortgage transaction, like the annual percentage rate (APR), and we have found great value in working together to understand what each of our clients are trying to accomplish financially, always leads to the best outcome for our borrowers.

If you have questions about interest rates or are thinking about purchasing a home we are always here to help.

We greatly value being your trusted home financing resource!

Robert Vellanoweth
West Coast Mortgage Group President

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Published On: January 20th, 2021Categories: Blog

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