Anytime you borrow money to buy a house, you will have a home loan. The lender provides money to pay for the house you buy, but they charge interest on the money. The interest is the revenue they earn from issuing the loan, and this is something you must pay for when buying a house. If you get a fixed-rate mortgage, you might wonder about how the interest charges work. Here is an explanation of how this works with a fixed-rate mortgage.
The Rate Never Changes
As the name suggests, a fixed-rate mortgage is a loan that offers an interest rate that does not change. When the lender offers a fixed-interest rate, the interest rate stays the same for the entire loan, even if the loan lasts for 40 years. If your mortgage offers this type of rate, your monthly payments will not change. Your first payment will be the same amount as every other payment you have.
They Base the Interest Charges on the Principal Balance
The amount of interest you pay changes each month and year. You will pay the most interest during the first year. You will pay the least during the last year. Your lender bases the interest you pay on the principal balance of your loan. Because the loan will be the highest during the first year, you will pay more for the interest charges. As the balance goes down, you pay less because your balance is lower.
You Can Reduce the Interest Charges by Paying Extra
When you get the loan, the lender will show you how much interest you will pay in all over the entire time of the loan. If you make every payment on time, you can expect to pay the amount the lender calculated. You will pay less money in interest charges if you pay extra on your monthly payments. Paying extra reduces the principal balance faster, so you pay less money in interest.
You Can Get a Lower Rate Only by Refinancing
If interest rates drop in the economy, you cannot access a lower rate unless you refinance the loan. The benefit of a fixed rate is the protection you have if interest rates increase in the world. If they decrease, though, you must refinance if you want a lower rate.
Fixed-rate mortgages offer security and consistency. If you would like to apply for one, contact a mortgage lender today to get started.