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Principal, Interest & Terms???

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?“.

  • Principal
    • Principal is the term used for the actual amount of money that you are borrowing in order to purchase the real estate of your choice. This is the amount of money the lender will lend you to use so that you can purchase the house that you want.
  • Interest
    • Interest is the amount that the lender will charge you for using their money to purchase your home. The interest is the amount that the lender will earn from investing their money on your real estate project. The interest rate given to mortgages is computed as a percentage of the principal loan amount. Interest rates placed on loans may vary from bank to bank. Interest rates for loans may be fixed or adjustable depending on the lending institution giving out the loan.

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.

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