mortgage interest rate : Fixed or Adjustable

2007-03-08 10:33:40

( Financial )



Even though a mortgage is only a piece of paper, it is probably the most important financial document you possess. It represents the biggest investment you will probably ever make in your life.

Mortgages are for large amounts and you will need a long time to pay off the loan. This is why it’s important to understand what the mortgage interest rate is all about and to look for low mortgage interest rates.

What do you need to know to get low interest rate mortgage – whether for equity loan interest rates or refinancing interest rates?

In terms of mortgage interest rate –
• Fixed-rate mortgages don’t change. If you intend to live somewhere for a long time this is the best option because your monthly payment doesn’t change.
• If, however, your life is less settled you should look into a mortgage interest rate which is adjustable. This type of mortgage has a variable interest rate. It combines:
o a period at the beginning when the rate doesn’t change
o with the interest rate during the following years changing annually.

If interest rates rise your monthly payment will also increase.

There are various mortgage interest rate options with adjustable mortgages –
• fixed for a year and changing every year thereafter
• fixed for a few years and changing thereafter
• fixed for more than a few years and changing thereafter
• and so on in increments.

You will be taking an “interest rate risk” because you won’t know what the rate will be in the future – whether in a couple or more years.

Unlike with a fixed rate mortgage, you take the risk that you could be paying more in the future. Lenders take that risk into consideration so they will offer you a discount during the first few stages – the more risk you take, the more they discount.

When you are considering mortgage interest rate you don’t only have the option of a fixed-rate or adjustable mortgage but other once-exotic mortgages which have become more popular.

Interest only adjustable mortgages
• no principal payment for a period at the beginning
• during this initial period you only pay interest
• this option is good for high-income earners who, instead of using their money for this principal payment can earn more investing it in a way that it appreciates rapidly, making their home even more affordable.

Option adjustable mortgages
• you aren’t locked into a single payment
• you can choose whether to pay:
o interest only
o the full payment
o a required sum that is even less than the interest
This type of option should be considered carefully – in the end you could owe more than you borrowed.

You will get the best mortgage interest rate based on your credit record as reflected in your credit report and score. If your credit record is bad you can still get a loan, but the mortgage interest rate is higher – known as a sub-prime loan.


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