How Are Interest Rates Calculated for Mortgage Loans

By definition, mortgage loans are loans secured by real properties by using documents, which are used as evidence of the existence of the loan, and as encumbrance of the particular realty by the granting of a mortgage that secures the loans. A home buyer or home builder can acquire financing either by purchasing or obtaining a loan against the property from a financial institution. This is the most common type of mortgage, which is the home equity loan, a type of loan wherein the borrower makes use of the equity in his home as collateral.

A home equity loan is also sometimes useful to help finance major home repairs or renovation, medical bills or college education. There are also equity loans, which are mortgages, placed on real estate in exchange for cash to the borrower. You could also opt for mortgage refinance, refinancing home or file for a bad credit mortgage. While these are mortgages involving your home, there are also commercial mortgages as well. But in place of your home as collateral, real estate is used to secure the payment instead. In this case, the collateral may be a commercial building or other business real estate, not residential property. However, these commercial mortgages are typically taken on by business entities instead of the usual individual borrowers.

Though computing for the mortgage loan amount may be affected by the size of the loan, maturity of the loan and the method of paying off the loan, the most important factor would be the interest rate for such loan. This is also the most important in deciding from which financial institution to apply for your mortgage, since different financial institutions offer varying interest rates. It also helps to understand how the interest rates are calculated for mortgage loans. Interest rates do fluctuate and this depends on a lot of economic factors like:

  • Certificate of deposit rates
  • Federal fund rates
  • Federal discount rates
  • Prime rates
  • Treasury bill (T-bill) rates

The interest rate is also affected by demand and supply. If the economy were doing well, naturally the mortgages’ demand would be stronger. Thus, interest rates would go up. However, if the economy is not doing well, there will also be less demand for mortgages thus interest rates drop. This will be good for those who have enough money to pay for down payment. Even if the interest rates are affected by the same set of factors, mortgage brokers and banks still do not offer same interest rates.

These financial institutions or lenders will still be able to set the rates as they please since they must also cover operating expenses and turn in a profit as well as be in competition with other lenders.

That is why, more often than not, people in the market looking for a lender would look for the best interest rate that is being offered. Thus now, empowered with this knowledge, you will be better equipped in analyzing and choosing from which financial institution to file your mortgage loan applications with.


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