Fundamentals of Understanding Your Mortgage Rate
A mortgage rate is the interest rate you pay on your home loan. Understanding your mortgage rate is important, because your rate, along with your loan type and your loan amount, determines your monthly mortgage payment. Mortgage rates vary from day to day and from one lender to another. When looking for a new mortgage, it’s always a good idea to shop around to see which lender offers the best rates. It’s also important to give some consideration to which mortgage plan is the most appropriate for your circumstances. Depending on the plan you choose, your mortgage payment may remain the same throughout the life of the loan, or it may vary over time.
Fixed-Rate Mortgages
A fixed-rate mortgage means that your mortgage rates will remain the same throughout the life of your loan. The fixed-rate is determined by the interest rate on the date your mortgage originates. This type of mortgage works to your benefit if the interest rate rises after your mortgage is approved.
ARM Mortgages
ARM stands for adjustable-rate mortgage. When you have an ARM, your interest rate fluctuates from month to month. This means the amount of your mortgage payment changes, too. An adjustable-rate mortgage works to your benefit if the mortgage rate drops after the origination of your loan. If the mortgage rate rises, however, you will end up with higher monthly payments.
Adjustable-rate mortgages are considered higher risk for the borrower, so lenders may be willing to offer you incentives to sign up for this type of mortgage.
Hybrid Mortgages
A hybrid mortgage locks in an interest rate for the first several years of the loan. When that initial period expires, the loan becomes an adjustable-rate mortgage.
Interest-Only Mortgages
If you sign up for an interest-only mortgage, your monthly payment for the first several years of the loan–typically the first five to ten years, will consist only of the amount of interest due. This is a tempting plan for many new buyers, because it means their initial monthly payments will be lower.
Interest-only payments, however, do not reduce the balance of the loan. When the specified period for interest only payments expires, homeowners face a sharp increase in monthly payments as the balance of the loan begins to come due.
Understanding your interest rate is vital to making sure you get the best deal possible on your mortgage. Take some time to figure out which plan makes the most sense for your circumstances.