How are mortgage rates determined?

Like almost all loans, mortgages also have an interest rate. This is the percentage which is charged in addition to the amount that you owe and it is paid to the lender for the services. For buyers, it is vital that you do your research to determine all of the potential interest rates which you could choose from. In the long term of paying back your home loan, even a minute percentage will have huge consequences on how much money you save over the course of your mortgage. So, how exactly are mortgage rates determined? 

The mortgage interest rate will be worked out as a percentage of the total amount that you borrow. The type of mortgage that you opt for will determine how exactly it works and how you will have to make the repayment. 

In the case of a repayment mortgage, you will pay back the value of your loan and the interest over the course in the form of monthly payments. This means that an amount of every monthly payment will reduce your overall loan and increase your share of equity. 

In the case of an interest-only mortgage, you will repay the capital at the end of the loan term, instead of contributing to it on a monthly basis. In the loan term, you pay only the interest that you owe every month. 

Mortgage interest rates are calculated annually, so it will be divided by 12 to work out the percentage which is applied every month. The calculation is: (mortgage rate / r12) x remaining balance = monthly interest charge. You will make your monthly payments until eventually your balance has been paid. 

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