Mortgage loans rates
Understanding mortgage and interest rates.
In the home loan market the buyer will come across various types of mortgage loans. But at the core of all the types lie either one of the two basic types; fixed rate mortgage and adjustable rate mortgage. All other types that exist in the market today are variations of these two types. So for any home loan consumer it becomes very important to get well versed with the true nature of these two basic types. In this article an effort has been made to explain these two in complete details.
Fixed rate mortgage:
This is the oldest home mortgage known and practiced. As the name itself is suggestive, the rate of interest does not change over the entire life of the loan. This also means that the monthly payments will also remain constant throughout. The major benefit of this mortgage type is that irrespective of what the current interest rate trends are in the market, the borrower still continues to pay the same old rate of interest. At the time of taking the loan the borrower is well aware of what his monthly payments will be through out so he can plan his budget accordingly. Also this can help the borrower to know exactly for what amount of loan, can he afford the monthly installments. When comparing the interest rates of fixed rate mortgage and the adjustable rate mortgage the borrower may find that the initial rate of interest in an adjustable rate mortgage is lower. The higher rate is charged by the lenders to keep risk margin, in case the rate of interest increases during the term, and the loan being on a fixed rate, they may not be able to make any changes. The rates are normally two to three percent more that the current interest rate in the market. But then for the kind of stability it offers over the term, it has come out to be a more preferred home mortgage.
The advantage can also prove to be a disadvantage in the event that the interest rates go down; you will still be making payments on the basis of the high interest rate.
The predictability aspect of fixed rate home mortgage is the main reason that nearly seventy five percent mortgage borrowers prefer this type of mortgage loan. If you are also among those, who avoid risks, then this loan is the safest bet for you.
The borrower at the beginning itself, realizes what the total amount will be that he needs to pay back for the initial loan amount.
In the recent times the trend for these loans has shifted from the traditional 30 year term to shorter terms of 10 to 20 years. The shorter the term is the borrower gets to enjoy a lower rate of interest. These lower interest rates are a result of the lowered long term risk anticipated by the lender. This would however mean that your monthly payments would go up significantly. The higher monthly payments could make it somewhat more difficult to qualify for short term fixed rate mortgages.
The short term loans are good for people who can afford the high monthly payments and want to build their house equity faster, to become the actual home owners.
The borrower can make use of one more alternative available in the short term loans, where he starts making bimonthly payments. The loan is on a normal term, only thing is that the monthly payment is split into two parts and the buyer will be required to make payments in every alternate week. So the number of installments in a year would go up from 12 to 26, making it easier for the buyer to avail of the short term loans. This will result in shortening the term of the loan to some extent as the borrower will be paying, in a year, an amount equal to 13 monthly payments. As a result the borrower also gets to pay a lower rate if interest.
Adjustable rate mortgages:
The other terms used for these loans are variable rate, non-confirming or flexible rate loans. The main idea on which they function is that the interest charged on the mortgage
will change on a periodic basis throughout the life of the loan. The result of this will reflect on the monthly payments that the borrower has to make. Unlike the fixed rate mortgage the monthly payments are never constant and change on a periodic basis. The change is however proportionate to the interest rate. If the interest rate drops the monthly payments come down and vice-a-versa.
For the initial period all adjustable rate loans start up with a low interest rate. This means low monthly payments and hence it is easier for the borrower to qualify for these loans.
But still the borrower must consider what kind of a monthly payment he can afford in the event of the rates going up.
To maintain some stability, the adjustable loans come with caps or limits attached to these, which define how much change in the rate is acceptable. These limits are defined for each period and for the full term of the loan. As part of the normal practice the periods are fixed at one, three or five years. The changed rate will be only for that period, and will further change at the end of the period. There are some of these loans which work on a negative amortization basis. The drawback of these is that in case your monthly payments are capped, and the interest rates show a rise which cannot reflect in your monthly payments, then your balance amount of debt goes on to increase instead of decreasing with the monthly payments.
Adjustable rates should mostly be the initial choice for the low interest rates, but always opt for one which can later be converted into a fixed rate mortgage.
It is essential for all borrowers to understand the benefits and disadvantages of each of these two types, to take the right decision in the light of his personal financial status and the market trends.
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