Help Borrowers Understand the Impact of Interest Rates on a Mortgage Loan

You (and your clients) can’t afford to get this one wrong.

Did you know that nearly half of surveyed credit card debt carriers in the US don’t know their associated interest rates? Is it any wonder, then, why some clients file into your office with little to no knowledge surrounding mortgage interest rates?

The fact is, though, that a home is probably the biggest purchase most of these people will ever make. That’s why it’s absolutely critical that dedicated mortgage professionals like yourself step up, prioritize borrower education, and overall help promote financial literacy.

And don’t worry. To help you brush up on your educator chops, we’ve compiled all the top tips and tricks for helping borrowers understand the impact of interest rates on a mortgage loan.

Here’s what you (and, ultimately, your clients) need to know:

Defining Mortgage Interest

Before you dive too far into specifics, you’ll want to ensure borrowers understand mortgage interest at its core. That’s why it’s always a good idea to start with a simple, straightforward definition.

Here’s a sample script you can use:

“Think of mortgage interest as the cost you pay for the privilege of borrowing money. Essentially, your lender charges you a percentage amount, say 5%, to use their money. That translates to a 5% interest rate.

Over time, with interest, you end up paying more than the amount you originally borrowed. This is how your lender recoups their investment, and one of the benefits they receive from the transaction.”

Clients might gain a little clarity if you remind them that mortgage interest is very similar to other kinds of interest that they might already have experience with, like interest on a student loan or a credit card.

But keep in mind that this can still be a somewhat tricky concept, so allow plenty of time for questions or clarifications before moving on.

Illustrating How Mortgage Interest Works

Now that everyone’s on the same page, it’s time to clarify how interest works and the actual impact of interest rates on a mortgage loan.

Be sure to cover the main points:

How Mortgage Interest Impacts the Amount They Pay Every Month

Ensure your clients understand that the higher their interest rate, the more they’ll pay each month. Remind them that this is the cost of borrowing that money.

How Mortgage Interest Amounts Impact the Amount They Pay Over the Life of the Loan

It’s critical that clients understand the fact that mortgage interest is calculated based on the loan amount that is outstanding and not the original loan amount. Clarify that, at the beginning of the loan term, a larger portion of their payment will go toward interest. As their principal shrinks, so will the portion they pay to interest.

Running the Numbers Together

Now, it’s time to contextualize all this information with some cold, hard numbers.

Depending on where the clients are in the homebuying process, you might be able to use their specific, real-world numbers. If not, it’s okay to create loan scenarios to illustrate your points.

Here’s a sample script you can use:

“First, let’s explore how mortgage interest impacts the amount you pay each and every month. Imagine you take out a 30-year mortgage for $250,000 at 5% interest. Your monthly payment, including principal and interest, would be roughly $1,342. Now, imagine the same loan amount for the same home at only 3% interest. In this case, the monthly payment drops to roughly $1,054. Just two percentage points means a difference of thousands of dollars per year!

Now, let’s take a look at how mortgage interest amounts impact the amount you pay over the life of the loan. Let’s say you take out a loan for $100,000 with 5% interest. In the first year, you would owe 5% of $100,000, or roughly $5,000, in interest. Over time, you pay down your loan and that $100,000 shrinks. Eventually, you’ll reach a point where you owe, say, $25,000. Well, 5% of $25,000 is around$1,250. Essentially, the amount you pay toward interest will keep getting smaller and smaller as your outstanding balance goes down.”

This might also be a good time to briefly mention adjustable-rate mortgages or even refinancing, so borrowers are aware of additional loan products that may fit their financial needs.

Wrapping Up: Help Borrowers Understand the Impact of Interest Rates on a Mortgage Loan

Our final tip: Don’t be surprised if some of your clients balk a bit at the outset of this conversation. Interest can be a tricky concept for the average consumer, especially in an already emotionally charged environment like homebuying.

That’s where you, the dedicated and knowledgeable mortgage professional, come in.

Simply define mortgage interest, illustrate how interest rates impact a mortgage loan, and run some numbers together to ease anxieties, improve the client experience, and ultimately champion borrower education.

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