The process of applying for a home loan is tedious enough, but unfortunately, it's just the beginning. You will eventually need to go on and understand the world of loan interest rates. Here is a short guide to help you know what's ahead and how to prepare.

What is Interest?

A great way to understand what interests is to think of it as a payment for service. In exchange for the financial institution giving you money for your home purchase, you agree to pay them for this in the form of interest. Your assets, credit score and the actual property are just some of the factors that are considered when calculating these rates.

Interest Types

The main thing to understand is the fact that all interest rates don't just vary from loan to loan, but the manner in which they are structured around the loan can also play a part. Start by learning about what the different types of loan structures are.

Fixed Rate

For a home loan with a fixed rate, the rate of interest you are charged remains consistent throughout the life of the loan, no matter the length. So, your payments will be the same as they are in year one of the loan as they are in year 15. With this loan type, generally, the shorter the life of the loan, the lower the interest rate.

Adjustable Rate

As their name suggest, adjustable rate mortgages have interest rates that fluctuate, which can be somewhat of a concern for some homeowners. While there is a pre-set rate maximum set for each of these types of loans, it's not unheard of for your loan payment to unexpectedly be higher one month with little explanation, other than the fact that the interest rate increased. This loan can be harder to plan for when your budget is tight.

Interest Only

With an interest only loan, you have the advantage of only paying interest on the loan for a period. For example, this introductory offer might be for the first 3 years of a 30-year loan. It sounds like a great option, but it's important to understand that you will eventually need to pay the unpaid principal, which can cause higher payments going forward. Interest only loans are not as common, but they are an option.

Make sure you have a clear understanding of the interest rate and structure for the loan you consider for your home purchase, as this will have a significant effect on the overall affordability of your home. Take your time and choose wisely.