Fixed-Rate Mortgage

Interest Rate

The interest rate is the cost of borrowing money for your mortgage, expressed as a percentage of the loan amount charged annually. Your rate is determined by factors including your credit score, down payment, loan type, loan term, and current market conditions. Even a small difference in rate can significantly impact total cost over the life of the loan. For example, a 0.5 percent reduction on a $400,000 mortgage can save over $40,000 in interest over 30 years.

Amortization

Amortization is the process of paying off a mortgage through regular monthly payments over a set period of time. Each payment is split between principal, which reduces the loan balance, and interest, which is the cost of borrowing. In the early years of a mortgage, a larger portion of each payment goes toward interest, with the balance gradually shifting toward principal over time. A 30-year amortization schedule, for example, spreads repayment across 360 monthly payments.

Principal

Principal is the original amount of money you borrow for your mortgage, not including interest. Each monthly payment reduces your principal balance, which in turn reduces the amount of interest charged in the following month. As you pay down the principal over time, you build equity in your home. On a $400,000 mortgage, the entire $400,000 is the principal, and the total amount you repay over the life of the loan will be the principal plus all accumulated interest.