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Different Types of Mortgage Interest Print E-mail

Monthly mortgage payments involve more than submitting payments to reduce the principal balance. If it were that easy, more people would be able to afford a home. On the contrary, mortgage payments include other fees such as taxes and insurances. Fortunately, these two fees are generally low, and rarely impede a buyer's ability to afford a particular loan amount. On the other hand, the interest rate on the loan contributes greatly to monthly payments. For this reason, acquiring a low interest rate is a concern.

The mortgage interest rate is the amount charged to the home buyer for financing their home purchase. The rate received is based on factors such as borrower's credit, down payment, debts, current market conditions and so forth. If the loan carries a higher rate, borrowers will pay more during the life of the loan. Many terms are used to express mortgage interest payments. Prior to acquiring a home loan, borrowers should fully understand mortgage interest. Here is a quick guide on identifying the different types of mortgage interest.

Interest Payment - Monthly mortgage payments include monies used to reduce the principal balance, and monies used to pay the interest. The dollar amount paid to pay the interest each month is called the interest payment.

Accrued Interest - Even though borrowers pay mortgage interest each month, the loan balance will continually earn new interest. If the interest due on the loan is $700, yet the monthly interest payment is only $550, the loan balance accrues an additional $150.

Cumulative Interest - The collective total of all interest payments paid over the life of the mortgage loan to date.

Initial Interest Rate - If choosing an adjustable rate mortgage, borrowers receive an initial interest rate. In this case, the rate will be fixed for a short period. Once the initial rate period ends, the loan rate will adjust. For example, borrowers agreeing to a 5/1 ARM will experience a fixed rate for the first five years, and then the rate will adjust annually for the remainder of the loan term. Another interest rate feature with adjustable rate mortgages is the interest rate ceiling (rate cannot exceed a maximum cap).

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