Interest Rates and How They Impact Your Mortgage

Understanding mortgage interest rates is key to saving money. Learn how they affect monthly payments, total costs, and tips to secure the best rate.

Mortgage Interest Rates
  • Building a home from scratch or even buying a home can be a financially intense undertaking.
  • Getting a mortgage is a big step, and before you apply, it’s important to understand how it works.
  • An interest rate is the cost of borrowing money.
  • Interest rates are influenced by the broader economy.

Sometimes we need a little help achieving our dreams of owning a home. Building a home from scratch or even buying a home can be a financially intense undertaking and such having the option of getting a mortgage helps ease some pressure.

Getting a mortgage is a big step, and before you apply, it’s important to understand how it works. One of the key parts of a mortgage is the interest rate. This small percentage has a big impact on how much you’ll pay overall. Let’s delve into the nitty-gritty;

READ ALSO: A Beginner’s Guide to Understanding Mortgage Loans in Kenya

What Is an Interest Rate?

An interest rate is the cost of borrowing money. When you take out a mortgage, your lender gives you the money to buy your home, but they charge you extra for letting you borrow it. This extra cost is the interest, and it’s calculated as a percentage of the total loan amount.

For example, if you borrow a certain amount of money at a 4% interest rate, the lender charges you 4% of the money borrowed as interest each year. Over time, this adds up and significantly affects how much you’ll pay for your home.

How Interest Rates Affect Your Mortgage

Interest rates directly influence two important things:

Your Monthly Payments

Higher interest rates mean higher monthly payments. For instance, if you borrow money at a 3% interest rate, your monthly payment will be much lower than if the interest rate is 6%. Lower rates make it easier to manage your finances and keep more money in your pocket each month.

The Total Cost of Your Loan

Over the life of a 15- or 30-year mortgage, the interest adds up. A small difference in interest rates can mean paying tens of thousands of dollars more or less. For example:

  • At a 3% interest rate, a $200,000 loan over 30 years will cost about $103,000 in interest.
  • At a 6% interest rate, the same loan could cost over $231,000 in interest.

That’s a difference of nearly $130,000!

What Influences Interest Rates?

Interest rates aren’t random; they’re determined by several factors, including:

Your Credit Score

Lenders use your credit score to judge how risky it is to lend you money. A high credit score shows you’re responsible with debt, which can help you get a lower interest rate. A low credit score might lead to a higher rate.

The Economy

Interest rates are influenced by the broader economy. In a strong economy, rates often rise because people are borrowing and spending more. During economic downturns, rates tend to drop to encourage borrowing and stimulate growth.

The Type of Loan

Different loans come with different interest rates. For example, fixed-rate mortgages have the same interest rate for the life of the loan, while adjustable-rate mortgages (ARMs) start with a lower rate that can change over time.

Loan Length

Shorter loans, like 15-year mortgages, often have lower interest rates than longer loans, like 30-year mortgages. While the monthly payments are higher with shorter loans, you’ll save money on interest in the long run.

Why Understanding Interest Rates Matters

Taking the time to understand how interest rates work can save you a lot of money and help you plan your finances better. Here’s how:

  • Improve Your Credit Score: Before applying for a mortgage, check your credit report. Pay off debts, make payments on time, and avoid taking on new debt to boost your score.
  • Shop Around: Don’t settle for the first lender you find. Compare interest rates from different banks and credit unions to find the best deal.
  • Consider Loan Options: Decide if a fixed or adjustable-rate mortgage is better for your situation. Think about how long you plan to stay in the home and your monthly budget.

READ ALSO: Kenya’s Mortgage Market: Challenges and Opportunities

Conclusion

Interest rates might seem like just a small number, but they have a big impact on your mortgage and your financial future. By understanding what they are, how they work, and how they affect your payments, you can make smarter choices and save money over time.

Homeownership is a dream worth pursuing, and with the right knowledge, you can make that dream a reality without overspending.

Lulu Kiritu
WRITTEN BY
BuyRentKenya
Notification Bell
Get expert advice and popular properties in your inbox weekly.
 YOU'RE SUBSCRIBED.
Check your inbox for your welcome email.
Notification Bell