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Finance

What is a Mortgage Rate?

By Luke Arthur
Updated May 17, 2024
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A mortgage rate is the percentage of interest that is charged by a mortgage lender on an annual basis. This amount can be fixed or adjustable. The mortgage rate can have a dramatic impact on the cost of a mortgage loan, and the total amount of money that an individual has to pay in interest. Securing a low rate can help a homeowner find a more affordable monthly payment to work with.

In most cases, the mortgage rate is quoted in an annual percentage rate. For example, if a mortgage lender says that a mortgage loan has a rate of 6%, this means that over the course of the year, the lender will charge 6% of the entire balance of the loan. This is a percentage that represents how much money will be paid to the lender in interest over the course of 12 months.

Mortgage rates can come in two different varieties. One type of mortgage rates is a fixed rate mortgage. With this type of loan, the interest rate will be the same throughout the loan term. For example, if an individual signs up for a 30 year fixed rate loan, he or she will have the same payment every month for the entire 30-year term.

Another type of mortgage rate is an adjustable-rate. With an adjustable-rate, the interest rate of the loan will be tied to a particular financial index. When the financial index moves up and down, the interest rate on the loan will move up and down also. Some adjustable-rate can be changed every month while others change annually. This type of interest rate can be difficult for homeowners to budget for because their payment can fluctuate drastically.

The mortgage rate of a loan contributes greatly to the total cost of getting a mortgage. In most cases, homeowners will have upfront costs in the form of closing costs, as well as interest over the life of the loan. Most of the time, homeowners end up paying just as much in interest as they do for the entire amount that they originally borrowed.

By getting a low mortgage rate, a homeowner can have a lower monthly payment. When getting a mortgage, it is important for the home buyer to shop around with multiple lenders so that the lowest rate can be obtained. Even a small variation in the percentage rate can significantly impact the monthly mortgage payment.

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