Taking Out A Loan

Posted by  on Apr 01, 2010

If you are taking out a mortgage loan, you should probably look into the mortgage interest rate in order to make sure that you are receiving the best deal. The mortgage interest rate is the percentage that is paid back to the bank or credit union for the home loan. The prime interest rate is a rate used by banks as a standard for their loans, regardless if it is a credit loan or a home loan. A bank's prime interest rate generally follows the federal funds rate set by the Federal Reserve System, which is composed of a Central Board of Governors, the Federal Open Market Committee (FOMC), and twelve regional Federal Reserve Banks. The Federal Reserve has several responsibilities, some of which include regulating banks, holding national and state reserves, and issuing currency to banks.

If you are using monetary policy tools including the federal funds rate, the discount rate, and reserve requirements, the Federal Reserve can affect the interest rates charged by banks nationwide. Interest rates mainly fluctuate due to the amount of money available in the national reserves. Banks are required to have a set amount in their reserves, and often borrow from the Federal Reserve, an equivalent drop is observed in prime rates nationwide. Likewise, when reserves decrease and demand increases, the federal funds rate increases. The Federal Reserve can actively increase or decrease the federal funds rate to maintain and promote economic growth and stability.

Keep in mind, however, that mortgage rates are not the only determining factor when calculating monthly payments on a home mortgage. Due to the Truth in Lending Act, which passed in 1968, lenders are required to disclose the annual percentage rate and total finance charge assumed by the borrower. The annual percentage rate (APR) is the total effective interest rate paid on the loan when calculated as a yearly rate. If you are calculating the interest paid back, consumers must also take into consideration origination and discount points. Origination points are lender fees charged for initiating the loan. Discount points are points paid to reduce the overall interest rate. Every point is reflected as 1% of the total loan amount. For example, a $500,000 loan with one origination point, one discount point, and a 5% listed fixed interest rate, would add a $10,000 fee to the loan amount. Therefore, the total loan amount would be $510,000, and the annual percentage rate would be 5.1748%. The APR allows consumers to compare mortgage rates between lenders.

However, the APR cannot always provide borrowers with the exact total cost of borrowing. One-time fees including appraisal, home inspection, credit report, title, and some preparation fees are usually not included when calculating the APR. When applying for a mortgage, consumers can choose between several types of mortgage interest rates including the popular fixed mortgage rate, variable/adjustable mortgage rate, or a combination.


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