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However, the builder may add the amount into the price of the home and you may end up paying a higher mortgage principal. Rate of Interest Interest is the cost of borrowing money and is paid to the lender. Mortgage interest rates are affected by the prevailing market interest rates. Mortgage rates are either fixed or variable. A fixed rate is locked in so that it will not rise for the term of the mortgage. A variable rate will fluctuate. The rate is set each month by the lender, based on the prevailing market rates. Your monthly payment is fixed to be the same each month for the term of the loan, but the percentage of each payment that goes toward the interest, and the percentage that pays down the principal, changes.

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But if rates rise, you may want to convert to a fixed rate. Bear in mind that this can cost you a cash payment penalty. If you select a variable rate, your lender may restrict the mortgage amount to 70% of the purchase price of the home and require a higher down payment on either a conventional or a high-ratio mortgage. Also, some lenders offer a protected or capped variable rate. This means your interest rate will not rise above a predetermined limit. However, you usually pay a premium for this protection.

Term The term of a mortgage is the length of time that certain factors, such as the interest rate you pay, are set at a negotiated level. Terms usually last anywhere from six months to 10 years. At the end of the term you either pay off your mortgage or renew it, possibly renegotiating its terms and conditions. Generally, the longer the term the higher the interest rate.

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Many experts suggest you select a long term if interest rates are rising. If rates are falling, you may want to select a short term and then lock in the rate when you think rates won’t go any lower. Note that the term is not the amortization period. Amortization This is the amount of time over which the entire debt will be repaid.

Most mortgages are amortized over 15-, 20- or 25-year periods. The longer the amortization, the lower your scheduled mortgage payments, but the more interest you pay in the long run. Open Mortgage This means you can repay the loan, in part or in full, at any time without penalty. Interest rates are usually higher on this type of loan.