Mortgage Interest Rate Definition

In viewing mortgages as a loan, individuals can better understand that the interest rate is the amount one is paying to borrow money. Upon returning the loan, one needs to repay both the principal or amount borrowed, as well as, the fee or interest assessed for the temporary usage of the funds.

The public has come to understand interest rates as presented in annual percentage amounts. For example, should one borrow $1000 at annual rate of 10 percent, then at the end of the 12 month period, he | she will be expected to repay not only the principal of $1000 but also the interest accrued of $100.

The purpose of interest is to both motivate the lender to give up the right to earning interest on their funds while deterring the borrower from spending funds owed to another.

The system of expressing interest rates in terms of percentages is most advantageous for it allows persons to compare rates on a wide range of loans, as well as, evaluate rates internationally regardless of the form of currency (i.e. shilling, mark, franc, pound) employed.

Major Forms of Interest Rates

The difference between "APR" and "APY"
The two major forms of interest rates include: "APR" short for annual percentage rate and APY the acronym for annual percentage yield.

In addition to the interest accumulated on the principally loaned amount, the APR also encompasses such costs known as points as they apply to a mortgage loan.

Points (one is the equivalent of the mortgage loan principal) are costs assessed by the lender in exchange for the mortgage being granted. Different than interest, points considered pre-paid interest, must be paid at the time of the loan’s origination.
As lenders vary in both the interest amounts and number of points, they charge borrowers the APR is a very useful measuring tool in ascertaining the overall cost of the mortgage, as well as, comparing costs with other available loans.

In contrast, the "APY" is the cumulative interest rate with respect to total moneys earned from the consumer’s vantage point. For example, should the consumer have $10,000 in two separate bank accounts (for a total of $20,000), he | she could determine the APY by reviewing how often the interest is charged, i.e. monthly versus annually. On account of the fact the money in the monthly interest account will result in a greater overall sum, the higher APY would be attributed to the account with the monthly accrual as opposed to the annual structure.