What is a Mortgage Rate?

Mortgage Rate Definition

Mortgage rate is the interest that a mortgage borrower will pay for money borrowed against a mortgage.

When a buyer borrows from a mortgage lender, the borrower will pay interest on the amount borrowed, as a fee for the use of the borrowed money.

The amount of the fee is the interest rate, also referred to as the mortgage rate. The rate paid may be fixed, in a fixed rate mortgage, or may fluctuate, in an adjustable rate mortgage or variable rate mortgage. The rate of the mortgage will have a substantial effect on the amount of money the borrower will pay to the mortgage lender.

Example

Mr. McGillicuddy obtains an adjustable rate mortgage of $200,000 with an initial interest rate of 5% and a 30 year amortization period. Mr. McGillicuddy’s monthly payment will be approximately $1067.38. However, if the mortgage rate increases to 6%, the monthly payment will increase to $1,189.65, an increase of over $122.00 per month. On the other hand, if the mortgage rate drops to 4%, the monthly payment will be $951.04, a savings of over $110.00 from the 5% mortgage rate.

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How Mortgage Rates are Set

Like other prices for goods and services, mortgage rates are set predominantly by the market, with some influence by the largest banks in the country, and the Bank of Canada. Probably the most influence over a mortgage lender’s mortgage rate is the residential mortgage bond market. The higher the yield on mortgage bonds, the higher the mortgage rate will generally be.

As to types of mortgages, generally, fixed rate mortgages carry a higher interest rate than an adjustable rate mortgage or variable rate mortgage. This is because a fixed rate mortgage will “lock in” a certain interest rate, and it cannot be increased over the term of the mortgage, even if mortgage rates in general are rising. Likewise, a longer term mortgage will carry a higher interest rate than a shorter term mortgage.

At First Foundation, we fully understand that a slight change in a mortgage rate will have a profound effect on your monthly payment. Mortgage rates are our business, as is finding you the lowest possible rate on the mortgage that best suits your needs.

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Last updated Aug 18, 2014