One of the concerning factors in home loans is the interest rate. Home loans can have flexible or variable interest rates or fixed interest rates. When you are going for a home loan, you should consider the interest rate because there are several mortgages where the interest rate increases every year or sometimes every couple of months. If you don't have the necessary finances to tackle an increasing interest rate then this might lead to more problems in the near future and you might also end up defaulting on the loan.

Savings

Even the smallest difference in interest rate can help you in savings. Hence it is important to look for a mortgage home loan that offers you the lowest interest rates. Lower interest rates mean that your monthly payment will be less and you will not undergo any kind of financial stress. In a couple of years, you will end up saving a lot of money due to the low interest rates. This helps especially when the market is volatile and the interest rates fluctuate up and down.

How interest rates are decided

The standard method or procedure is that the interest rates for a home loan follow the base interest rate of the central banking system. This ensures that new customers get the benefit of large number of discounts including fixed interest rates, discounts early in the year, capped rates and much more. The mortgage company you have approached should hence be offering you a competitive rate and there will be immense competition from other lenders as well. There are times when the lenders will try to slap a higher interest rate on your loan but if you negotiate well then they will have to offer you a good deal.

Comparing Home loans

While comparing home loans check out the APR (Annual Percentage Rate). The APR varies from company to company and from one mortgage loan to another. If the APR is higher, you should avoid taking the loan unless it has some extra benefits, which are in line with your requirement. The APR will actually show you the real cost of the home loan on a yearly rate. When you check the APR you will know exactly where you stand and if a lender offers you anything lower than what is mentioned as their APR then it means they are misleading you because the APR will take into account everything including upfront fees.

If a mortgage company offers you a 30-year fixed interest rate of 5.50%, when do you begin paying 5.50% interest on the money that you borrow? Your answer to the above question would probably be, "As soon as I make my first payment."

Unfortunately, you would be incorrect. But this is a common misconception. In fact, the one and only time that one would pay 5.50% on a 30-year, fixed rate mortgage at that rate would be in month 360. That is the only time in which your effective interest rate - the true cost of money over a fixed period of time - is equal to the interest rate on your Note.

So, what exactly does this mean? Not all that much if you are planning on making 360 monthly mortgage payments over the next 30 years to pay off your home loan. If, however, you consider that the average American holds his or her home loan for only 5 years due to either refinance or sale, this information is quite powerful.

Let's assume, for a moment, that you are like tens of millions of other American homeowners and will hold your mortgage for 5 years. Let's also assume that you have a 30-year, fixed-rate mortgage at 5.50% in the amount of $400,000.

Loan Amount = $400,000

Interest Rate = 5.50%

Monthly Payment of Principal & Interest = $2,271

Total Annual Payments = $27,252

Total Payments After 5 Years = $136,260

Mortgage Balance After 5 Years = $369,848

Non-Retrievable Interest Paid to Bank = $106,102

Total Equity Gained in 5 Yeats = $30,158

Rate of Interest Paid if Pay Off After 5 Years = 89.14%

As you can see, if you are like most Americans and pay off a loan in 5-years - even if it is at a low interest rate of 5.50% - the effective rate of interest that you would pay on your loan would be almost 90%. And in 5 years of making payments totaling over $136,000, you would gain only $30,000 in equity, with the remaining $106,000 having gone into the bank's pocket.

If you are among the millions of American homeowners who remain in a loan for an average of 5 years, you should be far more concerned with your monthly payment than your rate of interest. Ask yourself this question: When you make your mortgage payment each month, do you write your interest rate or your monthly payment on the check? Interest rates are, without a doubt, important. But very often, the mortgage program that you are in trumps the mortgage interest rate that you obtain. This is certainly not meant to discourage consumers from seeking the lowest possible 30-year fixed rate. It is merely to raise awareness that there are other considerations.