The interest rate on your mortgage plays a pivotal role in shaping your monthly payments and the overall cost of your loan. Beyond the percentage itself, understanding how interest is calculated and the differences between fixed and variable rates can help you make informed financial decisions.
How Interest is Calculated
Mortgage interest is calculated monthly by multiplying your remaining loan balance by the annual interest rate and dividing by 12. For example, if your balance is $300,000 with an interest rate of 6.5%, your interest payment for that month would be $1,625. As you pay down the principal, the interest portion decreases, allowing more of your payment to go toward reducing the loan balance. This dynamic highlights why securing a lower interest rate or opting for a shorter loan term can significantly reduce your total costs.
Impact on Monthly Payments
Your monthly mortgage payment consists of two key components: principal and interest. Higher interest rates increase the proportion of your payment allocated to interest, raising overall costs. Conversely, lower rates make homeownership more affordable by reducing monthly payments and freeing up more funds to pay down on the principal.
Fixed vs. Variable Rates
Fixed-rate mortgages offer stability; your interest rate and monthly payments remain constant throughout the loan term. This predictability is ideal for those seeking long-term financial consistency. On the other hand, variable-rate mortgages start with lower initial rates but fluctuate based on market conditions. While they can lead to savings if rates drop, they carry the risk of higher payments if rates rise.
Choosing between fixed and variable rates depends on your financial goals and tolerance for risk. Fixed rates provide security, while variable rates may offer cost savings in favorable economic conditions.
Contact one of our Mortgage Representatives today to assist you in meeting your homeownership goals!
Opinions expressed above are the personal opinions of the author and meant for illustration purposes only. For specific questions regarding your personal lending needs, please call RCB Bank at 855-BANK-RCB. With approved credit. Terms, qualifications and other restrictions apply. Member FDIC, Equal Housing Lender, RCB Bank NMLS #798151.
Sources:
https://www.experian.com/blogs/ask-experian/how-mortgage-interest-works/
https://www.mortgagecalculator.org
https://www.bankrate.com/mortgages/mortgage-calculator/
https://www.bankrate.com/mortgages/what-is-a-mortgage-interest-rate/
