What it is:
How it works (Example):
Mortgage interest is the percentage charged on a mortgage that must be paid in addition to the principal. The mortgage interest rate is related to prevailing interest rate levels and may be fixed or adjustable.
Fixed rate mortgages have identical amortized payments for the life of the loan. [InvestingAnswers Feature: Amortization Schedule Calculator] By contrast, the payments on adjustable rate mortgages (ARMs) vary based on the fluctuations in an associated mortgage index.
Why it Matters:
Mortgage interest rates correlate directly with the perceived risk of the borrower. In other words, the more likely the borrower is to default on a mortgage, the higher the mortgage interest rate. Mortgage interest is unique because it is a deductible expense on personal income tax returns in the U.S.