Mortgage Rate – Fixed or Variable, your choice

2007-03-08 10:33:40

( Financial )



Mortgage rate is the interest you pay when you apply for a mortgage loan with a bank or mortgage company. Mortgage rate can be fixed or variable, depending on the term or duration of your loan. Mortgage rate that are fixed are called fixed rate mortgage (FRM) while variable rates are called adjustable rate mortgage (ARM).

Fixed rate loan has an interest rate that is constant throughout the entire term of the loan. This is advantageous to borrowers since your loan payments (principal plus interest) will not be affected by the fluctuation of bank rates in the market. ARM on the other hand has interest rates that change based on the state of the economy and other factors. Adjustable rates are suitable for borrowers who only intend to sell after a short time because the initial rate is always lower that a fixed rate mortgage. Other mortgage loans have fixed rate for a certain period and adjustable rate for the remainder of the period.

Adjustments in interest rates are meant to bring the interest rate on a mortgage in line with market rates. A borrower is protected by a maximum interest rate called a ceiling which can be reset yearly. Adjustable rates usually have better or lower rates at the start of the loan period compared to fixed rate mortgages. The reason for this is that it tries to compensate for the risk brought by changing interest rates in the future.

You can also pay more money at the start to reduce the interest rate on your mortgage loan. This is advantageous to buyers who plan to live longer in their homes because the interest rate can be reduced significantly. For short term buyers, it does not provide much benefit because it adds to the closing costs.

Many financing and mortgage companies offer mortgages with varying rates that are always changing due to fluctuations in the economy and other factors. Borrowers must select carefully good rates from stable and reliable lenders and reasonable refinance interest rates. Mortgage brokers give tracking rates from various lenders and it is important that you choose one that can give you the best refinance rates. Remember that a broker will charge a percentage of the final mortgage amount as a fee upon loan approval.


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