Although cash is king, many people need to borrow money for the big purchases in life. If you’re going to borrow money you should really understand how your mortgage loan works.
Your payment is dispursed among a few different things. This includes mortgage insurance (if applicable), taxes and homeowner’s insurance (if you are escrowing), principal and interest.
One common question my customers have is “What is the difference between principal and interest?“.
Fixed-rate mortgages offer a set rate of interest that will not change throughout the term of the loan. Although the amount you will pay through your loan amortization will vary each month, the total amount that you will pay (principal and interest) remains the same. This is the most common type of mortgage.
Adjustable-rate mortgages on the other hand have interest rates that vary over time. The initial interest rate offered for this type of loan is typically given at a lower rate than a fixed-rate loan; although we have been experiencing fixed rates as low as adjustable rates for months now. However, as the loan term progresses, the interest rate rise until the interest rate surpasses those of the fixed-rate loans. Many lenders don’t even offer adjustable rates anymore.
Rates are ever changing, though the fluctuations are usually very minor. You are not guaranteed a rate until you lock it.
If you are unsure about the concept of principal and interest or you have any questions, please email me or give me a call. I’m always happy to answer your questions.