When all you have is a hammer, everything looks like a nail: mortgage payments in check

How Interest Rates Affect Your Mortgage

15:50 18 March 2013

Many first time homebuyers get so caught up in the excitement of purchasing their first home that they don’t care what the interest rate is as long as the lender says “yes”! This attitude caused a lot of homeowners to end up in foreclosure when high interest rates put their monthly mortgage payments beyond affordability when the economic crisis hit.

So just what is the purpose of a mortgage interest rate anyway? Well, when you purchase a home, it is not likely that you will be able to pay the entire cost in cash at closing (not most of us anyway).

• So the lender allows you to spread the cost of the home over many years, and you pay them by making monthly instalments.

 

• Your mortgage interest rate is the amount the bank charges you to allow you to spread those payments over time.

 

• Of course the higher the interest rate, the higher the monthly mortgage payment, and the higher the total amount you pay for the property once it’s paid for.

 

• What many buyers fail to realize is that a small adjustment to your interest rate makes a pretty huge difference in your monthly payment. A 1per cent difference doesn’t sound like very much.

 

• The monthly payment on a 30 year mortgage for a home valued at £360,000, at 5.5per cent is £2,044. The monthly payment on a 30 year mortgage for a home valued at £400,000, at 4.5per cent is £2,026.

 

• So with a 1% reduction in the interest rate, you can get a more expensive house with a smaller monthly mortgage payment. Just imagine what a larger percentage drop can do for your mortgage costs!

This is why it is so important to compare lenders and get the best possible interest rate that you can. Remember, your credit rating will determine how good of an interest rate you qualify for, so make sure your credit score is in great shape before you apply.