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How Much Interest in the First Year of a Mortgage?

If you’re planning to invest in property, you’re probably considering a mortgage. There’s a lot to take into account, and among all of the financial aspects you’re thinking about, you’ve probably pondered – How much interest in the first year of a mortgage?

People signing a contract

The first-year mortgage interest depends on numerous factors, such as the principal, the down payment, the repayment schedule, your credit score, and the type of loan. The rate also varies from lender to lender, so it’s important to make the right decision when you’re mortgage shopping.

How Much Interest in the First Year of Mortgage Can You Expect?

Many people consider only the listing price of the desired home when they’re trying to figure out the final cost of the whole ordeal. But the truth is that you will most likely have to pay a significant amount of interest over the term of your mortgage. This is essentially how mortgage lenders make money. Interest payments will make the total amount you pay for the property much higher than the initial purchase cost, but that’s completely normal. So, it’s important to carefully go over your budget and calculate how much you can realistically afford to pay over time.

Besides Repaying the Principal to the Lender, You Will Also Have to Make Interest Payments

Mortgages are usually fully amortized installment loans, meaning you have to repay the loan over a fixed period of time. Your monthly payment covers a percentage of the principal, which is the amount you actually borrowed, and interest, which is basically a fee you need to pay to the lender for borrowing the initial sum of money.

Usually, in the first phase of payments, a bigger percentage goes to interest, while the latter part of the loan favors paying off the principal amount. Additionally, interest rates cover taxes and life insurance as well.

Man and woman going through savings

How Is Interest Calculated and Which Factors Are Taken Into Account

No two loans are the same, and no two banks will offer you the same monthly payments. That’s why it can be difficult to determine if your mortgage packager is giving you good offers. The monthly payments of interest are generally calculated monthly by taking the remaining loan amount and multiplying it by the interest rate set for your loan, then dividing it by 12.

When you’ve just started paying off your mortgage, the amount that’s multiplied by the interest rate is, of course, the total sum of the loan. But, when it comes to the rate, there are numerous factors that are taken into account when coming up with it:

  • The type of loan you get,
  • The principal amount and the overall monthly payment amount,
  • Down payment for the house,
  • The duration of the loan term and the repayment schedule,
  • Current market factors and the prime rate,
  • The borrower’s credit score and debt-to-income ratio.

The Interest Rate Is Not the Same as the Annual Percentage Rate

When you’re researching the best mortgage lenders on Zillow, you will probably come across something called an annual percentage rate, or APR for short. Most people think it’s synonymous with an interest rate because they are both expressed in percentages, but the truth is there are major differences between the two.

To put it in the simplest terms, an APR takes into account the interest rate but also the broker fees, mortgage points, or any other charges you might have. So, it’s a more precise measure of how much you’re actually paying annually for borrowing money, and that’s why it’s a slightly higher percentage than the interest rate.

People shaking hands above a contract

Mortgage Interest Rates Are Always Fluctuating

So, now that I’ve covered the main factors that affect the rate you end up getting, you’ve probably realized that this rate depends not only on personal components but general market circumstances as well. That means that the average rate fluctuates constantly, and the offers you’ll get vary from lender to lender.

Here are the recent averages of annual percentage rates and interest rates for the most common types of loans:

Loan PackageAnnual Percentage Rate (%)Interest Rate (%)
5/1 Adjustable Rate (ARM)6.534%5.853%
10-Year Fixed-Rate6.059%5.708%
15-Year Fixed-Rate5.664%5.492%
20-Year Fixed-Rate6.138%6.005%
30-Year Fixed-Rate6.420%6.316%

Other Useful Things You Should Know When Looking for a Loan

The process of finding a mortgage can get confusing really quickly because there are just so many things to consider, from understanding mortgage points to figuring out how to get a mortgage deed. So, I’ve compiled a few more things you should know when looking for the right mortgage company to work with.

Adjustable-Rate Mortgage vs. Fixed-Rate Mortgage – What Are the Key Differences?

Besides the factors that affect it, it’s important to understand the two basic types of mortgage interest rates. An adjustable-rate mortgage (ARM) has a rate that can fluctuate, usually according to an index interest rate.

With an ARM, the monthly payment might kick off with a lower amount than for a fixed-rate mortgage, but it can increase substantially at any point. On the other hand, a fixed-rate mortgage (FRM) is a type of loan for which the interest rate is strictly set and can’t change during the whole term of the loan.

Man calculating expenses and holding a house model

When Is Your First Mortgage Payment Due?

Unlike apartment rent, which is due on the first day of the month for that month, the mortgage is paid in arrears, which means your monthly payment should be covered on the first day of the month for the previous month. The first payment is usually due one month after the last day of the month in which your home was purchased and the down payment has been made.

How to Get the Lowest Interest Rate Possible?

The lower the interest rate is, the lower the expenses you have to cover in order to borrow money. So, working with a mortgage company that offers a rate that’s close to the national average or lower is the way to go.

Here are a few additional tips for lowering the total interest amount you should keep in mind:

  • You should borrow only what you need – the more you borrow, the larger the cost of interest you need to cover,
  • Make a larger down payment if possible – it will raise your equity in the home, and the monthly payments will be decreased because you borrowed less,
  • Don’t go below 20% for a down payment – if it’s less than 20%, you will have to take out private mortgage insurance, which means higher monthly expenses.

It’s Essential to Compare Different Lenders in Order to Make the Final Decision

The process of trying to find the right mortgage company can be long and complicated. But, if you do your research thoroughly and familiarize yourself with all of the aspects of taking out a loan, you will definitely be on the right track. You will be able to say you’re a homeowner in no time!