How are mortgage interest rates determined?
Mortgage or other interest rates are determined by the banks on cost of funds, risk and operating cost.   The Fed raises money from the markets by issuing Tresury Bonds at a specified rate. This rate at which it raises money varies depening on the economy. Thus there are 2 rates: the rate at which banks can borrow money from the Fed, which is higher than the rate that the Fed would give banks for excess money deposited with them. So if the cost of borrowing is less, banks can borrow this money from the Fed and loan it to individuals at a slightly higher rate that would cover their costs plus a small profit. The risk associated with a mortgage is less, and hence these would be cheaper, then say a personal loan.  If the cost of borrowing goes up, the mortgage rate will go up. If the cost of borrowing money goes down, the cost would come down. Banks may not always borrow money to lend. If they have existing money, they can either park it with the Fed for a lower interest rate, or loan it to individuals for a rate higher than what they would have received from the Fed. One will find that the fixed 30 year mortgage rate is tightly correlated to the 10 year treasury. An adder of 2-2.5% or so, changing slightly with the rest of the economy, as money can get tight or loose independent of the rate itself. In 2011 we are witnessing low rates yet tough loan standards, this is the phenomenon I am referencing. Sheegan has a great explanation of how the TBA market contributes to  mortgage rates. The 30 Year Mortgage rates are closely tied to the 10-Year Treasury.  One can track this rate at many stock quoting sites using symbol TNX.
Up to some degree, a higher or lower interest rate means a bit less or a bit more money in your pocket. If the interest rate gets too high, you may be in trouble. So you first look at the situation and ask yourself: At what interest rate would I be in trouble?  If this is a $20,000 student loan, then even a very high rate wouldn't be trouble. It would be unfortunate and unpleasant, but not fatal. For a $800,000 mortgage, that's different. Each percent more is $8,000 a year. Going from 3% to 10% would change the interest from $24,000 to $80,000 a year, which would be fatal for many people.  In a situation where you can afford increasing variable payments without problems you can go for it. If your variable rate would vary over time between 4% and 6% you would still be even. In that situation, go for variable (taking into account where you think interest rates will go in the future). For a mortgage, the security would likely be more important. (On the other hand, if your dad is a multi-millionaire who would help you out, then that big rate increase wouldn't be fatal, and you could go for a variable rate mortgage).  In some countries, you can cancel any loan contract when the interest rate is raised. So raising a variable mortgage interest rate would allow you to look elsewhere without early repayment penalties. Check out if that is the case for you. Without knowing actual numbers it's tough to say.  Personally, I would pay off the car then, going forward, use the money that would have been paid on your car note toward your mortgage.  I always think of things in the worst possible scenario.  It's easier, and faster, to repossess a car than to foreclose on real estate.  Also, in an emergency situation, depleting your fund for your car loan and your mortgage would be significantly more detrimental than only paying a mortgage with a car owned outright.  Fewer obligations means fewer things to draw down your funds in an emergency. Whether the tax deductability of the mortgage interest outweighs the lower rate on your car loan will depend on a lot of factors that haven't been shared.  I think it's safe to assume with only 1% of separation the real difference isn't significant.  I think when determining which credit cards to pay off, choosing the one with the highest rate is smart.  But that's not the situation you're in. If you don't have foreclosure concerns I'd still pay off the car then start investing. When evaluating a refinance, you need to figure out the payback time. Refinancing costs money in closing costs. The payback time is the time it takes to recover the closing costs with the amount of money you are saving in interest.  For example, if the closing costs are $2,000, your payback time is 2 years if it takes 2 years to save that amount in interest with the new interest rate vs. the old one.  To estimate this, look at the difference in interest rate between your mortgage and the new one, and your mortgage balance. For example, let's say that you have $100,000 left on your mortgage, and the new rate is 1% lower than your current rate. In one year, you will save roughly $1,000 in interest. If your closing costs are $2,000, then your payback time is somewhere around 2 years. If you plan on staying in this house longer than the payback time, then it is beneficial to refinance.  There are mortgage refinance calculators online that will calculate payback time more precisely.  One thing to watch out for: when you refinance, if you expand the term of your mortgage, you might end up paying more interest over the long term, even though your rate is less and your monthly payment is less. For example, let's say you currently have 8 years left on a 15-year mortgage. If you refinance to a new 15-year mortgage, your monthly payment will go down, but if you only pay the new minimum payment for the next 15 years, you could end up paying more in interest than if you had just continued with your old mortgage for the next 8 years. To avoid this, refinance to a new mortgage with a term close to what you have left on your current mortgage. If you can't do that, continue paying whatever your current monthly payment is after you refinance, and you'll pay your new mortgage early and save on interest. When evaluating a refinance, it all comes down to the payback. Refinancing costs money in closing costs. There are different reasons for refinancing, and they all have different methods for calculating payback.  One reason to finance is to get a lower interest rate. When determining the payback time, you calculate how long it would take to recover your closing costs with the amount you save in interest. For example, if the closing costs are $2,000, your payback time is 2 years if it takes 2 years to save that amount in interest with the new interest rate vs. the old one. The longer you hold the mortgage after you refinance, the more money you save in interest with the new rate. Generally, it doesn't pay to refinance to a lower rate right before you sell, because you aren't holding the mortgage long enough to see the interest savings. You seem to be 3 years away from selling, so you might be able to see some savings here in the next three years.  A second reason people refinance is to lower their monthly payment if they are having trouble paying it. I see you are considering switching from a 15 year to a 30 year; is one of your goals to reduce your monthly payment? By refinancing to a 30 year, you'll be paying a lot of interest in your first few years of payments, extending the payback time of your lower interest rate.  A third reason people refinance is to pull cash out of their equity. This applies to you as well. Since you are planning on using it to remodel the home you are trying to sell, you have to ask yourself if the renovations you are planning will payoff in the increased sale price of your home. Often, renovations don't increase the value of their home as much as they cost. You do renovations because you will enjoy living in the renovated home, and you get some of your money back when you sell. But sometimes you can increase the value of your home by enough to cover the cost of the renovation. Talk to a real estate agent in your area to get their advice on how much the renovations you are talking about will increase the value of your home. Increasing rates from .75% to 1% is an attempt to control debt.  The new 1% rate drives down demand for bonds based on the old .75% rate and drives down demand for stocks who have decrease profit because they pay more interest on debt.  This is the federal reserves primary tool controling inflation.   1% is what the banks pay to borrow money, they base their lending rates on this 1% figure.  If a person can guarantee a .75% return on money borrowed at 1%, they will opt to save and instead lend their money out at 1%. The periodic rate (here, the interest charged per month), as you would enter into a finance calculator is 9.05%. Multiply by 12 to get 108.6% or calculate APR at 182.8%. Either way it's far more than 68%.  If the $1680 were paid after 365 days, it would be simple interest of 68%. For the fact that payment are made along the way, the numbers change.  Edit - A finance calculator has 5 buttons to cover the calculations:  N = number of periods or payments %i = the interest per period PV = present value PMT = Payment per period FV= Future value In your example, you've given us the number of periods, 12, present value, $1000, future value, 0, and payment, $140. The calculator tells me this is a monthly rate of 9%. As Dilip noted, you can compound as you wish, depending on what you are looking for, but the 9% isn't an opinion, it's the math. TI BA-35 Solar. Discontinued, but available on eBay. Worth every cent.  Per mhoran's comment, I'll add the spreadsheet version.  I literally copied and pasted his text into a open cell, and after entering the cell shows,  which I rounded to 9.05%. Note, the $1000 is negative, it starts as an amount owed.  And for Dilip - 1.0905^12 = 2.8281 or 182.8% effective rate. If I am the loanshark lending this money, charging 9% per month, my $1000 investment returns $2828 by the end of the year, assuming, of course, that the payment is reinvested immediately. The 108 >> 182 seems disturbing, but for lower numbers, even 12% per year, the monthly compounding only results in 12.68% "There are some loan types where your minimum payment may be less than the interest due in the current period; this is not true of credit cards in the US.  Separately, if you have a minimum payment amount due of less than the interest due in the period, the net interest amount would just become principal anyway so differentiating it isn't meaningful. With credit cards in the US, the general minimum calculation is 1% of the principal outstanding plus all interest accrued in the period plus any fees.  Any overpayment is applied to the principal outstanding, because this is a revolving line of credit and unpaid interest or fees appear as a charge just like your coffee and also begin to accrue interest.  The issue arises if you have multiple interest rates.  Maybe you did a balance transfer at a discounted interest rate; does that balance get credited before the balance carried at the standard rate?  You'll have to call your lender.  While there is a regulation in place requiring payment to credit the highest rate balance first the banks still have latitude on how the payment is literally applied; explained below.   When there IS an amortization schedule, the issue is not ""principal or interest"" the issue is principle, or the next payment on the amortization schedule.  If the monthly payment on your car loan is $200, but you send $250, the bank will use the additional $50 to credit the next payment due.  When you get your statement next month (it's usually monthly) it will indicate an amount due of $150.  When you've prepaid more than an entire payment, the next payment is just farther in to the future.  You need to talk to your lender about ""unscheduled"" principal payments because the process will vary by lender and by specific loan. Call your lender.  You are a customer, you have a contract, they will explain this stuff to you.  There is no harm that can possibly come from learning the nuances of your agreement with them. Regarding the nuance to the payment regulation: A federal credit card reform law enacted in May 2009 requires that credit card companies must apply your entire payment, minus the required minimum payment amount, to the highest interest rate balance on your card.  Some credit card issuers are aggressive here and apply the non-interest portion of the minimum payment to the lowest interest rate first.  You'll need to call your bank and ask them." The generic representative of interest rates is the 10 year treasury bond rate. (USA). As an approximation most other interest rates do tend to move up and down with the treasury rate, but with more or less sensitivity.  Another prominently discussed interest rate is the short term loan rate established by the Federal Reserve for loans it makes to banks.