Basic Info about Interest Rates

When it comes to mortgages – do you ever get lost in the lists of acronyms? Taking out a mortgage is intimidating enough without those confusing combinations of letters looming over your head. Plus, have you ever thought about what those letters stand for? What does APR even mean?

Have you been there? We have. Sometimes all the info can feel like learning a language and in a way it is similar. Breathe deep. We’re going to try to help clear up some of the mystery.

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Understanding interest rates can be confusing, but it doesn’t have to be!

 

For starters we’ll look at two items:

Interest rate and APR

Interest is the extra amount you pay a lender to borrow money for your mortgage loan. Your interest rate is a percentage that is charged on the amount borrowed and does not include other fees.

Example: If I give you $30 dollars for groceries one week and you agree to pay me back $35 dollars in a year – the interest you paid is $5 dollars. The interest rate is the percentage of the extra amount over the original amount borrowed.

APR means annual percentage rate.  APR describes the yearly cost of your loan in percentage terms, taking into account other loan charges.  APR includes interest and  certain permissible fees and  costs.  APR is usually higher than your interest rate, because it includes other fees and charges associated with the money you are borrowing, which are spread over the life of the mortgage loan.

Example: Similar to the interest rate, APR is expressed as a percentage, but offers a more complete view of the cost of borrowing.

A word of encouragement:

Interest rates are lower as of late. The 70s and 80s had some of the highest interest rates in modern American history. Thankfully, they have significantly dropped over the years – making borrowing more appealing.

Something to consider:

Rates are ever changing. There are many factors in the economy and the tide of real-estate that can cause them to fluctuate. One example, fitting for this year is the effect of an election year on interest rates. No matter who is elected, rates are usually impacted in some way.

Good things to do:

  • Use a mortgage calculator (the hardest bill to pay is the one you aren’t prepared for!)
  • Seek an interest rate that fits your situation (low or high – know where you stand)
  • Set up a savings plan/ account
  • Shop around/ research (the best decision is an informed one)

 

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