Mortgage Interest 101
Interest is not that difficult to understand. When you borrow some cash, you need to pay for being able to do so. When you lend someone some cash, they need to pay you. Interest is best described as the cost of borrowing money. The rate of interest that you are charged depends on a number of factors but, in general, it is common to charge a higher rate to people who are a worse credit risk. You are basically insuring against the chances of a default occurring.
Interest rates can be set and stay the same throughout the life of the mortgage or can change as federal rates change. You generally pay more for having a fixed rate because there is no chance of it being increased during the life of the loan. In the negative column is that,if you fix at the wrong time, you will pay a lot more interest than otherwise. In the positive column is that, if you fix at the right time, you can ride out the vagaries of the market and weather the storm.
Interest rates are fluid and can seem to alter from one point to the next. If rates are at a low level, it is a good time to fix your mortgage interest. The following are the main factors that influence interest rates in general – the interest rate charged for borrowing federal funds; the fluctuations in the stock market and T-bills.
Amortization is applied to home loans as a way of counter-acting the effect of people repaying their loans early. What this means is that the main chunk of interest comes into play in the first few years that you have a home loan – The majority of your payment initially will be applied to the interest installment rather than the debt itself. In the first five years that you have your loan, you are not going to see much change in the level of the bond. Make use of this mortgage amortization calculator today.
To circumvent these preparations, you need to put as much extra money into the loan as possible. Extra payments are applied to the capital amount of the loan and so you can save a lot in terms of interest if you do this. It is a good idea to check first whether or not you will actually be penalized for repaying your mortgage early – these penalties can be high in some cases.
Also look at ways to manage your money so that you can “park” money in the loan until needed. This can be a great way to reduce the balance in the bond, even if only for a few days at a time and to thus save you a good deal of interest. Speak to your lenders about getting an access facility.