Owning a home is rewarding, both on financial and emotional levels. Unfortunately, most people don't have near enough money to buy a home with all cash. That is what creates a market for home loans. Home loans provide a way for people to obtain houses without having to pay a large upfront payment. Lending institutions are able to loan out large sums of money for home loans, but in order to keep functioning, they need to make money. The main way that lenders make a profit in their business is by charging interest on the money borrowed. The percent of interest charged for the privilege of being loaned money is called an interest rate.
Fixed Interest Rate
According to the Federal Reserve Board, a fixed interest rate involves monthly payments of both principal (the amount of the loan borrowed) and interest which remain the same every month for the full life of the loan. Home loans which have fixed interest rates usually include terms of repayment for 15, 20 or 30 years. For example, if a home loan was taken out for $400,000 with a repayment term of 15 years and a fixed interest rate of 5.0 percent, the payment every month would be approximately $2,333, $2,222 which would be principal and $111 which would be interest.
Variable Interest Rate
Variable interest rate loans are also called adjustable interest rate loans. They are different from fixed interest rate loans in that the amount of interest that the borrower has to pay fluctuates up and down based on market conditions, rather than constantly staying the same. The Federal Reserve Board states that variable interest rate loans usually start out with very low interest rates, which is often attractive to buyers. When the time comes that the interest rate adjusts, the interest rate rises, bringing higher total payments.
APR
APR stands for annual percentage rate. The Federal Reserve Board explains that the annual percentage rate of a loan expresses costs of obtaining the loan in a percentage as a yearly rate. APR takes into account the interest rate, as well as additional costs like broker's fees and points. The annual percentage rate is a good tool for potential borrowers to look at when analyzing home loans, because it expresses the total yearly cost of credit.
High Costs
Lending Tree explains that a drawback of home mortgage loans is the fact that you end up repaying more money than you borrowed to obtain the house in the first place, because of the interest. For instance, Lending Tree states that a $160,000 loan repaid over 30 years may actually involve the borrower paying as much as $383,217.48 total over the life of the loan. Luckily, these high costs are split into more manageable monthly payments in the case of most loans.
Negotiation
The Federal Reserve Board suggests always trying to negotiate the interest rate on home loans. They state that lenders and brokers offer different loan terms to different customers, even if they have the same qualifications. Negotiating may be able to get you a lower interest rate, or at least better terms. If you find an interest rate that seems good to you, you should lock-in the rate, by obtaining the rate in writing from a lender or broker, so that you can get the same low rate when interest rates adjust.
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