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Understanding Mortgage Interest Rates
By: Matt Ellsworth
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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