Understanding Mortgage Interest Rates
Even before you go hunting for the best mortgage deal for
your dream house, you need to have a clear understanding of
mortgage interest rates. Mortgage interest rate is one of
the biggest factors (though not the only factor) in deciding
what mortgage deal is best for you. Also, mortgage interest
rate is one of the most important things that you use to measure
how good a mortgage lender is. So let’s get started
with gaining some basic understanding of mortgage interest
rates.
The mortgage lenders keep floating new mortgage plans all
the time. However, all these plans are based on just 2 types
of mortgage interest rates i.e. fixed mortgage interest rate
and adjustable mortgage interest rate. While the fixed mortgage
interest rate is fixed for the entire term of the loan, the
adjustable mortgage interest rate adjusts itself after short
intervals of time and is based on a pre-determined financial
index (like treasury security). The adjustable mortgage interest
rate could adjust itself on monthly, annually, 3-yearly, 5-yearly
or as agreed with the mortgage lender. So the mortgage interest
rate remains fixed till the next cycle of mortgage interest
rate adjustment when it adjusts to the prevailing mortgage
interest rate which is based on the financial index.
Moreover, you might have a cap (a limitation) on the amount/percentage
by which the monthly-payment/ mortgage-rate can adjust at
each adjustment cycle. Further, the mortgage interest rates
are different for different loan durations e.g. the fixed
mortgage interest rate for a 15 year loan is lesser than the
fixed mortgage interest rate for 30 year loan tenure. Besides
that there are mortgage plans that offer you the option of
changing from adjustable mortgage interest rate to a fixed
mortgage interest rate. Such mortgage plans become very handy
when you are on an adjustable mortgage interest rate that
is expected to rise in the near future. Moreover, such an
option can save you the hassle of going for a refinancing
option.
Another factor affecting the mortgage interest rate is the
points i.e. the percentage of total mortgage amount that you
pay upfront towards interest. One point is equal to 1% of
the total loan amount. Paying points entitles you to a lower
mortgage interest rate (for the mortgage lender, it’s
like an instant return on their investment). Generally, mortgage
lenders float various combinations of points and mortgage
interest rates for various offers. The points system is more
effective in high interest regime since in low interest regime
the rates are already so low that incentive to further lower
the interest rates is not so attractive.
So, those were some basic facts about mortgage interest rates
which everyone should be aware of.
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