What is interest and how to pay less

Interest is the cost of a loan. Interest is the profit that a bank makes when offering a loan to you. Every loan has interest, especially with banks.

The interest rate is the cost of interest, and the rate can change over time. In the 1980’s, the interest rate to purchase a home as high as 20%! Since that time, we have seen rates decline. In 2019-2021 we have seen them about as low as they have ever been, and, most likely as low as they can ever get. The federal reserve bank sets the “prime” rate, and mortgage rates are determined off of that.

A fixed interest loan means that the interest will never change. It will always stay the same rate during the entire life of the loan. Some banks offer adjusting rates, meaning that rates can change during a specific time of the loan.

When you purchase a home through us using our private financing, all of our rates are fixed. They will not adjust or change.

Here is a key thing to know about interest: You pay the most interest on the 1st payment of a loan, and the least amount of interest on the last payment of the loan. This is because the interest rate is charged on the BALANCE of the loan. The first day that you finance a home and obtain a loan is your highest balance. So you are paying the most interest at that time. The longer you pay on your loan, the less the interest you have to pay. Again, this is because your balance is getting lower and lower , hence your interest is getting charged on a smaller amount.

The way to save money on interest is to do 2 things:

1) Refinance your current loan to a lower cost loan. Any time you use a bank they charge upfront fees called ‘loan costs’ and ‘closing costs’ , so check those fees when shopping for a new loan. The interest rate on the new loan needs to be low enough to make up for the extra costs of a new loan. Sometimes it will be. But do remember to check to make sure.

2) Pay extra on your loan. Any time you make extra payments (on top of the minimum monthly payment), those payments are applied directly to the principle balance of the loan. Those payments essentially do not have any interest fees in them, so you are paying directly on your loan balance. This can save a lot of interest over time.

Well, I hope this helps. Let us know if you have questions about this.


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