Understanding Interest Rates

In large part, the best way to understanding interest rates is to know that there are a variety of methods and indices that are used to calculate the amount of interest that we pay. In addition and as part of understanding interest rates and their calculations is to know that certain factors affect the rates that we are charged as well. While Federal laws make it easier to comparison shop for different interest rates, in order to make an informed decision it is useful to understand the relationships between the different methods.

Understanding Interest Rates and Calculations

Interest by itself represents the price borrowers pay to lenders for credit over a specified period of time. The amount that we pay depends on a number of factors including, the dollar amount lent, the length of time involved and the stated (or nominal) annual rate of interest. In addition, the repayment type schedule and the method used to calculate the interest has a large effect as well.

The various methods that are used to calculate interest are basically variations of the simple interest calculation method. The basic concept underlying simple interest is that the interest is paid only on the amount originally borrowed for the length of time the borrower uses the credit. The amount borrowed is known as the principal amount of the loan. In a simple interest calculation, the interest is computed only on that portion of the original principal still owed.

What Influences Mortgage Rates?

Mortgage rates are affected by mortgage backed securities (MBS) and what is happening in the market on any given day. Mortgage backed securities are bonds that are connected to groups of mortgages being take out by homebuyers who are locking in their interest rate on that particular day. These securities trends are very complicated. Mortgage rates are set at a minimum on a daily basis in the mortgage industry, typically by 9:00 or 9:30 a.m. Mountain Time. If there is a lot of movement in the securities market, prices may be reissued throughout the day and this is why it is important to understand that the rates you see today, can be much different tomorrow.

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