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Language of the Loan - Interest Rates

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Well, we can’t say we didn’t see that coming. Yesterday, the Federal Open Market Committee met regarding the state of interest rates in the US. And though it comes as a surprise to no one, the decision was made to raise the benchmark Fed funds rate by 25 basis points. This is likely to have an effect on mortgage rates going forward into 2017, which could result in as much as a .25% increase.

Sooooo…what does that mean? Well, in today’s ‘Language of the Loan’ series, we’re going to break down exactly what an interest rate is, and how this new increase to the benchmark will affect the average American when purchasing a home.

So let’s start at the beginning - what is an interest rate? The textbook definition reads as follows: The annualized cost of credit or debt-capital computed as the percentage ratio of interest to the principal.

Huh?

Let’s try and simplify it a bit: An interest rate is the proportion of a loan that is charged as interest to the borrower, expressed as an annual percentage of the amount outstanding.

Come again?

Think of it this way - your monthly mortgage payment is broken down into two halves, principal and interest. Principal is the money that you originally agreed to pay back to the lender. So if you took out a $250,000 loan, that $250k is only the total amount of principal you owe back.

Interest is the cost of borrowing money. That cost is determined by your lender, and expressed in a percentage. That’s your interest rate - it can vary depending on your financial history, mortgage product, etc. Right now the average rate on a 30 yr. fixed mortgage is hovering around 4.00%.

So let’s apply this to a hypothetical loan situation. You borrow $250,000, at 4.00%. That means that yesterday, on a fixed rate 30-year mortgage, your monthly mortgage principal and interest payment would have come to $1,194.

Today, after the increase? $250,000 at 4.25% on a fixed 30 year comes to a monthly payment of $1,230 - or an increase of $36.

That may not seem like much - but that depends on how much money you need to borrow! Make sure that you keep in constant contact with your Loan Officer, as rates change daily. It could mean the difference between a home you can afford, and one that you need to let pass you by.

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