Financial Vocabulary

• 1). Commit to learning a limited number of basic financial terms well enough that you won't have to look them up each time they appear in print or conversation.
  
  
• 2). Learn and know how to use the following five terms:
  
  1. MORTGAGE INTEREST RATE: the interest rate banks charge an average customer for a home loan.
  
  2. DISCOUNT RATE: the rate at which banks borrow money from the Federal Reserve Bank.
  
  3. THE FED: the common term used to refer to the Federal Reserve Bank.
  
  4. PRIME RATE: the interest rate banks offer their best customers, usually large corporations and other large organizations.
  
  5. POINTS: a point is equal to one percent; thus, if your bank's prime rate is 2%, and it quotes you a home mortgage interest rate of two points above prime, or "prime plus two," you are being asked to pay 4%.
  
  
• 3). Learn to use these terms to discuss home mortgage rates with lenders.
  
  

Who Determines Interest Rates and Why They Fluctuate

• 1). The Fed determines the rate at which it loans money to banks in response to economic conditions such as inflation and recession in order to inspire healthy economic growth.
  
  
• 2). Individual banks, savings and loan associations, credit unions and mortgage lenders determine the rate at which they loan money to organizations and individuals depending upon what the market will bear in order to earn a profit.
  
  
• 3). The Fed adjusts the discount rate up or down as part of a responsive strategy to control the country's economic health, generally increasing the interest rate in response to inflation and decreasing it as a countermeasure to an economic downturn such as a recession or depression.
  
  
• 4). In addition to responding to market conditions, bankers and mortgage brokers attempt to predict future economic conditions in order to increase profits.
  
  

How to Calculate a Mortgage Payment

• 1). Gather three facts:
  
  (1) the interest rate you expect to pay
  
  (2) the term of your mortgage (most are 15 or 30 years, and some calculators ask for number of years, while others request the number in months)
  
  (3) the amount of money you hope to borrow.
  
  
• 2). Insert the numbers on loan amount, interest rate and term into the appropriate blanks in an amortization schedule calculator.
  
  
• 3). Click "Calculate" to determine the amount of your payment.
  
  
• 4). Try a few alternatives. Example: a 7% interest rate on a $75,000 loan for 30 years (or 360 months) will require a monthly payment of $498.98; a 5% interest rate on the same loan will require a monthly payment of $402.62.
  
  
• 5). Add to the amortized payment any other applicable fees, such as property taxes, mortgage insurance, fire or flood insurance, etc., that the lender may require to be contributed to an impound account, from which it will make these annual payments on your behalf. These amounts neither determine nor adjust your interest rate, but they will affect your payment amount.