How to Calculate an Interest Mortgage Rate

Research your investments carefully.

Calculating a mortgage rate is a function of four variables: the amount borrowed, the points or charges that must be paid at closing, the length or term of the mortgage and the regular cycle or period of payment (usually monthly). The broader interest rate calculation is affected by the size of the mortgage and the credit rating. The effect of these factors can be determined by the professional assisting your mortgage. The effective mortgage rate will change over time as a result of prepayments, late payments or refinancing the mortgage.

Things You'll Need

• Mortgage calculator program

Instructions

1. Subtract the amount of down payment for the house from the price of the house. Depending on the amount borrowed, you will pay more interest for a jumbo loan mortgage than for a conventional mortgage. This is because jumbo mortgage loans are less marketable and thus harder to place with financial institutions. Your housing professional can tell you the difference in interest rate cost.

2. Review your credit rating before applying. The mortgage rate offered you is, in part, a function of your credit rating. Clear up errors and incorrect information and attempt to raise your credit rating to lower your interest cost. Your housing professional can tell you the difference in interest rate cost between good and bad credit ratings.

3. Use the mortgage calculator suggested in the Resources. Enter the data as required. The result will be the actual rate paid, taking into account points but assuming no late fees or prepayments. Shorten the maturity in order to reduce the rate.

4. Variable rate mortgages cannot be calculated to maturity because no one knows how the rate will reset. However, use current rates for the initial period and use the ceiling rate or maximum rate the mortgage can reset to in order to compute a worst-case interest rate.

5. Experiment with a different combination of rates. The important calculation is total interest paid. The fewer dollars paid, the more dollars you keep. Avoid 15-year mortgages because of the onerous payment schedule. Consider getting a 30-year mortgage rate instead and make an extra month's payment each year. The result is close to a 15-year mortgage with a slightly higher rate, but there is no legal demand that you make extra payments each month.

Tips & Warnings

• Ignore teaser rates on variable mortgages. Use fixed rate mortgages wherever possible, especially if you expect to remain in the house for more than 7 years.

• Don't consider variable rate mortgages that can raise interest rates to levels where you can no longer afford the mortgage. Look for variable rate mortgages with ceiling rates.

References

• Fixed or Variable Mortgage Decision

Resources

• Bankrate.com Mortgage Calculator