Understanding Interest Rates
March 2, 2021
Taking the time to understand APR and how it compares to other interest rates has the potential to save you a lot of money over the course of your lifetime. We have summarized four helpful articles from Consumer Financial Protection Bureau (CFPB) to help you better understand interest rates and how they impact monthly loan and mortgage payments.
The difference between a fixed rate and a variable rate is one of the most basic and easily digestible aspects of interest rates. According to the CFPB, fixed rates do not fluctuate with changes to an index. In contrast, variable rates change with the index based on your rate schedule and are more likely to change over the life of the loan or mortgage.
Once this is understood, it will be easier to break down your monthly mortgage payment. The CFPB explains the difference between principal, interest, and your monthly mortgage payment. The typical formula is broken down as Principal + Interest + Mortgage Insurance (if applicable) + Escrow (homeowners’ insurance and taxes) = Total Monthly Payment.
It is also important to know the annual percentage rate (APR). According to the CFPB, this will help you determine the actual cost of interest, and will make it easier to compare two or more loans. It is your given right to know the APR, and your lender must disclose this information before you agree to a loan.
The length of the loan term is just as important to consider as the interest rate. It is typically more advantageous to take on a higher monthly payment and a shorter term than a lower monthly payment and a longer term. The CFPB provides a breakdown of four different loan terms associated with borrowing $20,000 with an interest rate of 4.75%.