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Mortgage Interest RatesWhy are Mortgages Rates Important?Twothirds of U.S. households own their own homes (as opposed to renting), and most homeowners pay a mortgage. Thus, the level of mortgage rates determines how much all these homeowners have left to spend on other things. How much people can spend on other things, in turn, affects the overall economy. Interest rates on home mortgages are important because mortgage interest is a major item in many people’s budgets. Even small changes in mortgage interest rates can have a large impact on how affordable it is to own a home. That’s important, because homeownership is the major way many families build up wealth. The interest payments over the life of a mortgage often add up to more than the amount of the mortgage loan. For example, the interest payments on a 30year, $100,000 mortgage at a 7% interest rate will add up to about $140,000 over the 30 years. People who have mortgages may deduct the interest they pay from their income in calculating how much income tax they have to pay. That’s a significant benefit of owning a home. How Do FixedRate Mortgages Work?The interest rate for a fixedrate mortgage remains the same for the life of a mortgage, and the monthly payment also stays the same for the life of the mortgage. For example, a 30year, $100,000 mortgage at an interest rate of 7% requires a monthly payment of $665.30. Every month for 360 months, the payment of principal plus interest equals $665.30. The vast majority of the monthly payment in the early years of the mortgage is for interest, and only a small amount reduces the principal, the amount of the original loan still owed. The opposite is true in the latter years of the mortgage. Therefore, most of the monthly payment in the early years of the mortgage is incometaxdeductible, but very little of the payment in the later years is deductible. Usually, however, homeowners will find the payments more affordable in the latter years, because incomes generally rise, and inflation reduces the "real" burden of the fixed payment. When Does it Pay to Refinance

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