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Interest Rate
Interest is the cost of borrowing money and is paid to the lender. Mortgage
interest rates are either fixed or variable.
Fixed Interest Rate
A Fixed Interest Rate is locked in so that it will not rise for the term
of the mortgage.
Variable Interest Rate
A Variable Interest Rate will fluctuate. The rate is set each month by the
lender, based on prevailing market rates. Your monthly payment is fixed to
be the same each month for the term of the loan, but the percentage of each
payment that goes toward the interest and the percentage that pays down the
principal changes.
Some lenders offer a protected or capped variable rate. This means your interest
rate will not rise above a predetermined limit. However, you usually pay a
premium for this protection.
Term
The term of a mortgage is the length of time that certain factors, such as
the interest rate you pay, are set at a negotiated level.
Terms usually last anywhere from 6 months to 10 years. At the end of the
term you either pay off your mortgage or renew it.
Generally, the longer the term, the higher the interest rate.
Amortization Period
Few of us can pay off the entire principal of a large mortgage in a six month
term. So, lenders calculate or “amortize” the mortgage payments
over a much longer time, often as long as 25 years. They aren’t loaning
you the money for a single 25 year period, they’re just calculating
the payment schedule as if it will take you that long to pay back the principal
plus interest. During the amortization period you will probably renew the
mortgage for several terms.
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