When you get a mortgage, there are three important terms for you to remember.
- Interest Rates
- Amortization
- APR
I have combined these three terms here because they are related, and you will understand them better if I explain them together.
Interest Rate
“Interest Rates” are the price that lenders charge for the use of their money. So, when interest rates are high, it’s because lenders are charging you more to use their money right now.
Again, it’s a trade-off between now and later.
Lenders are only going to give you so much money to use over the next 15-40 years (the life of your mortgage). They work backwards from that figure using interest rates.
If you have a higher interest rate, you have less money to spend now. If you have a lower interest rate, you have more money to spend now.
Amortization
Now I want to tell you about a funny word – it’s one of those words that most people look at and say, “What in the world is that?”
Amortization is the length of the mortgage, usually given in five-year increments – 15, 20, 25, 30, 35 or 40 years. This is an incredibly important number, because the total interest you pay is much higher over 40 years than 15 years. In fact, it’s almost triple the amount!
The advantage of having a longer amortization is that your monthly payments are lower.
The “Stretch” Strategy:
If you are currently in a 25-year loan on your home, you can actually buy 25-30% more home and keep your payments exactly the same with a 40-year amortization.
The difference? Much more interest paid over the long-term.
This is very useful if you need a bit of a “stretch” to get into the home you really want.
APR
“APR” stands for “Annual Percentage Rate.” Now that sounds friendly, too, doesn’t it?
The APR is what you get when you add the interest rate and all of the other mortgage costs together and then calculate what the loan will cost you each year, based on all of the fees added together.
Lenders are required to tell you what the APR is on any loan… so that you can know what the real interest rate is.
So when you are calling around looking for the best rates, make sure and ask what the APR is on each loan that you are being told about!
Summary: Mortgage Terminology
- ✅ Interest Rate: The “price tag” for borrowing money.
- ✅ Amortization: The length of the loan. Longer loans = lower payments but higher total interest.
- ✅ APR: The “real” cost. Interest Rate + Fees combined.
Understanding these three terms will help you compare different loan offers and choose the one that fits your financial goals.
