HOW DOES INTEREST WORK ON A LOAN?

Are you in the market for a new home, but you just aren’t sure about the ins and outs of how interest works on a mortgage loan? If so, don’t worry, because we have done some of the heavy lifting for you and spoke with mortgage lender, Bobby Andres, from Bank of England to explain everything you need to know before you put pen to paper and sign for a new home mortgage.

When the news talks about the Feds cutting the interest rate to zero, that doesn’t mean that much to you as a customer. The interest rate is the number you want to look out for. A federal interest rate is how much commercial banks lend their excess reserves to one another. So, if you are buying a home or refinancing one, this won’t mean much to you.

Typically speaking, most people take a loan out on a home for about 80% of the purchase price. When you do this, you have to pay it back- with interest. The options start here. You can have a fixed or adjustable interest rate. A fixed interest rate does not change during the life of your loan. The longer the term, the lower the monthly payment, however you will pay more for your home in the long run. For most people, it is a good idea to go with a 30 year mortgage so you can give yourself a cushion for unforeseen circumstances and not live outside of your means. If you want to cut down on the life of your loan, an option would be to pay down your principal with extra payments and still pay your home off early. An adjustable interest rate it exactly what it sounds like. This rate can change depending on what the terms are for that particular loan, but typically start out very low and increase over time. An adjustable rate a good option for someone who doesn’t see themselves staying in that particular home forever and know you may look to sell within the next five years or so.

In today’s covid climate, it is best to consult with your mortgage lender- have them pull your credit and together determine the best course of action when putting offers in on a possible new home. While you do need to watch the interest rates, you do need to be aware of how the market responds to the new economic challenges we are currently facing.

Pay attention to interest rates and what you can afford on a monthly basis will save you in the long run. Don’t be afraid to ask for help! A great agent will connect you to knowledgable mortgage lenders that will only lead you in a direction best suited for your needs.