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 Mortgage
Interest Rates Explained
The world of mortgages is confusing at best. There are literally
thousands of mortgage companies anxious to loan you money
and hundreds of terms to learn. Where do you begin, and
how on earth can you compare mortgages to find out what
is best for you? To begin, it is most helpful to learn the
basic types of interest rates, how they work and what it
means to you. Here are the most common types of interest
rates explained:
Fixed rates. Fixed rates are the old standby. They are what
you'll find when you're investigating traditional mortgages.
When your loan has a fixed rate, your interest doesn't change
throughout the entire life of your loan. Most fixed rate
mortgages last for 10, 15, 20 or 30 years. This is a great
option when interest rates are low. If you can lock in an
interest rate of 4%-8% for the life of a 30 year loan, you're
doing pretty well. However if interest rates are high, you
may want to look for the next type of interest rate option.
Adjustable Rate Mortgage. Otherwise known as an ARM, an
adjustable rate mortgage is just that - adjustable. Usually,
lenders guarantee a rate for a specific period of time,
generally three, five, or seven years. However, once that
time period has expired, the interest rate on the loan will
change to the current going rate. Generally, there is a
cap on how high the interest rate can go. This is called
a ceiling, and your ceiling will be documented in your lending
agreement.
For example, if the current fixed interest rate is 10% and
you decide you'd rather go with an ARM, which is generally
lower than the current fixed rate, then maybe you could
get an ARM at 7% guaranteed for five years. Once your five
years have expired, the current interest rate could be lower
than your current interest rate or it could be higher. If
it is up to 14% that's a huge jump and your mortgage will
go up quite a bit; however, if you have a 3 point ceiling
agreement in your mortgage your interest rate will only
go up to 10%. With an ARM, your interest rate is subject
to change every year after the initial reduced rate period
has expired.
Two Step mortgage. A two step mortgage works very similarly
to an ARM. You will lock in an interest rate, usually a
bit lower than the going interest rate, for a designated
period of time. Once that time has expired, your second
step is for your interest rate to jump to the going rate.
It's a bit of a gamble because you don't know what the future
holds. However, it does enable you to get into your home
at a lower interest rate.
Balloon. With a balloon mortgage your interest rate and
monthly payment remain the same for a certain number of
years. At the end of that time period, your loan is due
in full. If you choose this option you will have to refinance,
pay off your home, or sell your home. Balloons generally
run for five or seven years.
There you have it. Just about any mortgage you come across
will fall into one of these discussed categories. Happy
borrowing! About the Author
Eddie Lamb owns LiveMortgageFree.com a website devoted to
helping homeowners, first time buyers or tenants. You'll
get your own exclusive access to the program and bonuses
that will get you on the road to living Mortgage Free and
will change the way you view money forever. For more information
visit: LiveMortgageFree |
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