Rate of Interest

The interest you pay the lender is the cost of borrowing. How much interest you pay is usually controlled by prevailing market interest rates. Whether the interest rate fluctuates is determined by what type of mortgage you choose. There are fixed rate and variable rate mortgages.

Fixed rate mortgages are set for the term of the mortgage. Variable rate mortgages adjust every month, depending on what the prevailing market rate does. If it goes down, the interest rate goes down. If it goes up, the interest rate rises.

How to Compare Rates of Interest

Often you will be quoted an annual percentage rate (APR). This is supposed to make it easier to compare different loans. In reality, there are other factors that you need to consider. It is always based on the amount you are borrowing, the term of the loan, the interest rate and your monthly and total payments. The calculation of the APR include mortgage insurance, mortgage life insurance, application, broker, lender, appraisal, and legal fees.

Variable rates are a poor choice when fixed interest rates are low, as historically rates have always gone back up after a low. When fixed rates are high, variable rates can be beneficial, because history has shown that rates go back down.