Understanding Interest Rates

Article Posted by Expert Author: Sam Stieler  on 09/23/2013

Why is interest rate so confusing?

Even the most effective tool out there won’t do much good if you don’t know how to use it. For example, when properly used, a mortgage interest rate calculator can give you a lot of financial insight. But most homeowners aren’t entirely sure how to use one of these calculators, and this can prevent them from finding the best possible terms for their property’s loan.

Thankfully using an interest calculator really isn’t that difficult. You just need to know how it works. But understanding how an interest rate calculator works first requires an understanding of how interest itself works.

Why Is Interest So Confusing?

It may be the many numbers involved with the calculation of interest rates that makes them so confusing for some homeowners. But the name of the game with interest rates is to get the lowest rate you can. Adding to the confusion is the fact that getting the lowest interest rate doesn't necessarily mean that you will get the most affordable loan.

Interest is actually a pretty simple concept, but at first glance it can seem confusing. With so many numbers and decimal points, it's normal for a layman to not be able to make heads or tails of what they're really being offered. But when you break it down, interest is actually pretty easy to understand.

Back to Basics: What is Interest?

Interest is basically the difference between how much you owe on your home and how much you are paying for your loan each month.

The interest rate you receive on your loan is primarily determined by your credit rating. It’s pretty much impossible to increase your credit rating overnight, which means if you’re about to sign up for a home loan, or if you’re about to refinance your home loan, you’re pretty much stuck with the interest rate the bank’s going to give you.

Many homeowners wonder how they can pay less over the life of their loan if they can't reduce the interest rate itself. One solution is to pay more than your loan’s minimum every month. This will greatly reduce the amount of time it takes to pay off your loan. The less time you take to pay off your loan the less interest you will pay over the life of your loan and the less overall money you will need to spend to clear the balance owed on your mortgage.

Buying points may be an option. This is basically a fee that allows homeowners to lower their rates by paying some money up front. But it may be up to ten years before any savings on interest are realized.

A mortgage interest rate calculator is a great tool can help you figure out exactly how much more you should pay every month and what the exact impact of each monthly payment will be over the life of your loan.

Using The Mortgage Calculator

There are different types of mortgage calculators available; you simply have to know which type of mortgage you have. For fixed-rate loans, you need only know three numbers: how long your loan's term is, how much money you need to borrow and your interest rate. You simply plug in these numbers, press the 'calculate' button and you will instantly know how much you will be paying per month, as well as how long it will take you to pay off your loan.

An adjustable-rate calculating tool works a little differently. The same three numbers will be needed for this type as would be needed for the fixed-rate calculator. But this calculator will also require the amount of time prior to your loan adjustment, as well as the adjustment intervals. As well, you will need a number for your loan's cap, or the highest amount your interest rate will reach.


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