What is mortgage interest, and how does it work?
When you purchase a piece of property, chances are you’ll be taking out a loan to help pay for it. Under your mortgage agreement, you will pay a certain amount to whoever owns the loan each month until you have paid off the loan or refinance. Typical mortgage payments are broken down into several categories you can remember with the acronym PITI.
- Principal
- Interest
- Taxes
- Insurance
Much in the same manner that credit cards and student loans charge interest, so do mortgages. Mortgage interest is the amount of money you pay in order to borrow a specific dollar figure. You’ll usually see it represented as a percentage, or more specifically, annual percentage rate (APR). Here’s what you need to know about this essential part of buying property.
Mortgage interest can be fixed or variable
How much you pay in mortgage interest is based on many factors, including your interest rate at the time of purchase, your financial standing, as well as your loan amount.
Depending on your loan, your mortgage interest can be fixed or variable. This means that the rate either stays the same month to month or changes based on current interest rates. Fixed-rate mortgage loans are the most common, as they are predictable and easy to budget around.
Variable interest rate mortgages (or adjustable-rate) aren’t as common. Still, they are attractive to buyers who don’t plan to stay in their homes for a long time. This is because rates during the introductory period are often lower than fixed rates*.
Guild Mortgage also offers the option of a Lock and Shop program** which allows you to lock in your rate for 90 days, even if rates go up in the meantime as you shop for a home. You can take advantage of a one-time float down option if rates go down.
For full Lock and Shop program information, plus terms and conditions, visit www.guildmortgage.com/cap-hbe-terms.
Homeowners can claim mortgage interest on their taxes
As a homeowner, you may benefit from claiming mortgage interest on your taxes. According to the IRS:
“You can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately) of indebtedness. However, higher limitations ($1 million ($500,000 if married filing separately)) apply if you are deducting mortgage interest from indebtedness incurred before December 16, 2017.”
This is a great benefit to homeowners who rely on that reimbursement for extra cash in their pocket to put into savings, invest, or use at their pleasure.
Feel free to reach out with any questions about your home financing options. You’ll be happy to know that you have allies here at SmartMortage.com.
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*Guild does not offer ARMs with an introductory fixed interest rate of 5 years at this time. 7 year and 10-year initial period terms are available.”
**Upfront lock-in fee required