When borrowing money to purchase a home, the interest rate determines how much money will be paid back to the lender, in addition to the amount borrowed. It is important to get the lowest possible interest rate when purchasing a home. Even a small difference in the interest rate can make a major impact in the total amount paid to the lender, especially when borrowing money for a long period of time.
What determines interest rates
There are several factors that will affect the interest rate on your home loan. The length of the loan (30 year mortgage), your credit history, and current economic conditions are all considered when a lender determines which interest rate will be applied to each mortgage loan. Banks will usually calculate the interest rate by starting with a base rate and then use the terms of the loan along with your credit report and credit history to ultimately determine the interest rates for your mortgage.
Examples of mortgage interest
On a 30 year $200,000 mortgage, a change in the interest rate from 4% to 5% will cause the borrower to pay an extra $42,772.56 in interest payments over the duration of the loan. Seeing that even a small change in interest rate can have a profound impact on the amount of money you will pay to your lender, you should always search for the best rates possible.