Mortgage Rates: Know Before You Borrow

2007-03-08 10:33:40

( Financial )



Every American family dreams of owning a house and a car or two but not everyone can afford it. Unless you have a rich relative willing to lend you a sizable amount, it is inevitable that you would be turning your attention to mortgages so it is important to learn a few things about mortgage rates.

Mortgage Loan Interest Rates

An interest rate is the rate paid per period by a borrower on a loan of money. A mortgage loan interest rate is an interest rate on a loan secured by a pledge of specific property to the creditor.

You use the interest rate to compute the interest payment you have to pay the lender. The rate is usually quoted on an annual basis but the interest payment is calculated monthly. To get the monthly payment then, you divide the rate by 12 before you use it to calculate the payment.

15-Year versus 30-Year Mortgage Rates

You can choose to pay your mortgage over different periods but the most common payment periods are 15 years and 30 years. Fifteen year mortgage rates are usually lower by one-quarter to one-half percent than on a 30-year mortgage. However, the monthly payment is higher. Thirty year mortgages carry higher interest rates but your monthly payment is lower. Another advantage of a thirty year mortgage is that you free up more of your money for other things.

Factors that Affect Mortgage Rates

Inflation affects all interest rates and mortgage interest rate is no exception. Higher inflation rates mean higher mortgage rates and lower inflation rates translate to lower mortgage rates. Mortgage rates are also affected by the efficiency of the housing finance system. Since the US housing finance system is more efficient than most, US mortgage rates are only one to one and a half percent higher than long-term government bond yields. In other countries, the figure is twice as high, which means higher mortgage rates.


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