This Is A Great Option When Interest Rates Are Low

Category: Finance, Mortgages.

The world of mortgages is confusing at best. Where do you begin, and how on earth can you compare mortgages to find out what is best for you?

There are literally thousands of mortgage companies anxious to loan you money and hundreds of terms to learn. To begin, it is most helpful to learn the basic types of interest rates, how they work and what it means to you. Fixed rates are the old standby. Here are the most common types of interest rates explained: Fixed rates. They are what you ll find when you re investigating traditional mortgages. Most fixed rate mortgages last for 10, 15, 20 or 30 years. When your loan has a fixed rate, your interest doesn t change throughout the entire life of your loan.

This is a great option when interest rates are low. However if interest rates are high, you may want to look for the next type of interest rate option. If you can lock in an interest rate of 4% -8% for the life of a 30 year loan, you re doing pretty well. Adjustable Rate Mortgage. Usually, lenders guarantee a rate for a specific period of time, five, generally three, or seven years. Otherwise known as an ARM, an adjustable rate mortgage is just that- adjustable. However, once that time period has expired, the interest rate on the loan will change to the current going rate.

This is called a ceiling, and your ceiling will be documented in your lending agreement. Generally, there is a cap on how high the interest rate can go. 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. If it is up to 14% that s a huge jump and your mortgage will go up quite a bit. Once your five years have expired, the current interest rate could be lower than your current interest rate or it could be higher. However, if you have a 3 point ceiling agreement in your mortgage your interest rate will only go up to 10% .

Two Step mortgage. With an ARM, your interest rate is subject to change every year after the initial reduced rate period has expired. A two step mortgage works very similarly to an ARM. Once that time has expired, your second step is for your interest rate to jump to the going rate. You will lock in an interest rate, usually a bit lower than the going interest rate, for a designated period of time. It s a bit of a gamble because you don t know what the future holds. Balloon.

However, it does enable you to get into your home at a lower interest rate. With a balloon mortgage your interest rate and monthly payment remain the same for a certain number of years. If you choose this option you will have to refinance, pay off your home, or sell your home. At the end of that time period, your loan is due in full. Balloons generally run for five or seven years. Just about any mortgage you come across will fall into one of these discussed categories. There you have it.

Happy borrowing!