What Is a Mortgage Interest Rate?

Mortgage interest rates are one of the costs you pay to your lender for a home loan. Interest rates are reflected in your monthly mortgage payment and vary depending upon your credit score, your down payment and on the type of loan you choose. Mortgage interest rates are either fixed or adjustable and will have a substantial effect on your monthly mortgage payment.

History

Mortgage interest rates have fluctuated significantly over the past 25 years. According to hsh.com, the highest rates were in July of 1984 and the lowest were in June of 2003. Recent economic concerns may soon push the mortgage interest rates to their lowest levels we've seen in decades.

Types

Interest rates will vary depending on the type of home loan you qualify for. A fixed rate for 15 years will generally offer the lowest interest rate, if your down payment is at least 25 percent and your credit score is above 740. Another option is a 30-year fixed rate which will likely carry a slightly higher interest rate than a 15-year rate. Any fixed rate loan you take will have a stable interest rate for the life of the loan. Adjustable Rate Mortgages, ARMs, are loans in which the interest rate will vary based on an index rate. ARM interest rates are lower in the beginning, but your monthly payment can increase significantly over the life of the loan.

Significance

Qualifying for a mortgage entails having a good credit score, or FICO, a down payment of 20 to 25 percent, and proof of income sufficient to make the payments. The interest rate you receive is also based on these criteria. Persons with the best credit and the highest down payment have the best options when it comes to mortgage interest rates.

Considerations

Low interest rates are often an important consideration for the potential home buyer. The higher your interest rates are, the higher your monthly payment will be. Consider saving for a large down payment and improving your credit score as much as possible before buying a home and your efforts will be reflected in your interest rate and will pay off over the course of your home loan.

Misconceptions

The largest portion of your initial monthly payment goes to the interest, not the principle, of the mortgage loan. Visit mortgagecalculator.org to see how the various interest rates will impact your payments (see Resources below). On a 30-year fixed rate mortgage, it takes about 20 years for your monthly payment to apply to the principle more than to the interest.

Resources

• Mortgage Calculator