Everyone dreams of owning their own home, but not everyone is able to pay for one outright. A mortgage loan helps make homeownership possible by allowing people to finance their homes through a bank or other lending institution.
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By borrowing money from a lender and using your home as collateral, you can get a loan to cover the cost of your home. The interest you pay on the loan is how the lender makes money, so it’s important to understand how it works before you take out a mortgage.
What is Mortgage Interest?
Mortgage interest is the percentage of your loan that you pay to your lender to borrow money. In other words, it’s the cost of borrowing money from a bank or other financial institution.
Mortgage interest is typically paid monthly but can also be paid bi-weekly or annually. Over time, as you continue making mortgage payments, the principal portion of your payment will increase while the interest portion decreases.
Types of Mortgage Interest
There are two types of mortgage interest:
- Fixed interest rates
- Floating interest rates
Fixed interest rates:
A fixed-interest rate means that your interest rate stays the same for the life of your loan. This means that if you have a fixed-rate mortgage, your monthly payments will stay the same, even if interest rates rise. This can provide peace of mind for borrowers who are worried about interest rate rises, as they can budget accurately for their repayments. But overall, fixed-rate loans tend to provide more stability and predictability, which can benefit for many borrowers.
Floating interest rates:
A floating interest rate, also called a variable or adjustable rate means that your interest rate can change over time. That can mean that your monthly mortgage payments might go up or down, depending on the current market conditions.
Because of this, a floating interest rate is often used for short-term loans. When choosing a floating interest rate loan, it’s important to consider how much the rate could increase or decrease over time and whether you could afford the payments if the rates went up.
However, floating interest rates can also offer some benefits, such as lower rates than fixed rates. Ultimately, whether a floating interest rate is right for you depends on your individual circumstances and financial goals.
Why do you Have to Pay Mortgage Interest?
Mortgage interest is the fee charged by a lender for the use of their money. The lender sets the interest rate, which can be fixed or variable.
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When you take out a mortgage, you agree to pay back the loan, plus interest, over a set period of time. The most common mortgage term is usually 15-30 years, but you can choose shorter or longer terms.
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The amount of interest you pay will depend on the size of your mortgage, the term of your mortgage, and the interest rate.
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The bank charges you interest on the loan because they are taking a risk by lending you money. If you default on the loan, the bank could lose a lot of money. So, they charge you interest to help offset that risk.
How Mortgage Interest work?
Mortgage interest is the proportion of what you borrow that you pay back over the length of your mortgage agreement, usually expressed as a percentage. The interest rate you pay will be determined by the size of your mortgage, the length of time it has been outstanding, and the interest rate.
For example, If you take out an AED 300,000 mortgage over 30 years with an interest rate of 3.5%, your monthly repayments will be AED 1,266, and you will end up paying a total of AED 459,320 in interest over the life of the loan.
How to Calculate Mortgage Interest?
To calculate your monthly mortgage interest, you’ll need to know:
- The amount of your loan
- Your interest rate
- The number of years in your loan term
Once you have all this information, you can use Emortgage’s mortgage interest calculator to determine how much interest you’ll pay each month and over the life of your loan.
