Basic Finance Care Finance tips
Before buying and moving into a new home there is one big decision to make and that is whether to choose a fixed or a variable mortgage rate. This decision will determine what interest rate you are going to pay on a monthly basis for your mortgage for the next twenty years or so, so choosing the right rate is definitely one of the most important things to do. However, there isn’t one correct way to go about this, as there are many factors you need to take into consideration before you make that initial decision, but here are some facts to help you out.
What is a Fixed-Rate Mortgage?
A fixed-rate mortgage is one where there is a set interest rate that cannot change in the duration of the mortgage (if you don’t refinance). The fixed mortgage rate guarantees you a determined interest that you have to pay each month.
The advantage of a fixed-rate mortgage is that the homeowner will not have to contend with varied loan payment sum of money that changes with the interest rates.
What is a Varied-Rate Mortgage?
A varied-rate mortgage or adjustable-rate mortgage (ARM) is one where typically the interest rate is not fixed and can vary from month to month, potentially going either higher or lower over longer periods of time.
The biggest advantage of variable rate mortgage is that the interest rate modifies periodically. Monthly principal and interest payments vary according to a preset agenda throughout the life of the loan.
Most creditors and private firms need a down payment of about 5 to 20 percent of the entire sum of money from a borrower. This is more than the government mortgage loans with lower down payments. Your down payment also affects your loan-to-value ratio, or the amount of stake you have in your home compared to your mortgage. If you put down a larger down payment, you’ll start off with more equity in your home.
Factors to Keep in mind before Applying for a Mortgage Loan
While taking a fixed or varied rate mortgage loan for purchasing a brand-new house, it is important to keep in mind your monthly income, interest rate of the loan and actual price of your house.
You need stable and reliable sources of monthly income before applying for a mortgage loan.
The interest rate of the loan is an important factor to consider as it will decide how much money you will have to pay every month. While the whole act of loan processing will continue with paperwork and reviewing, the rate of interest will vary.
The price of a house impacts your mortgage. For example, if you want to purchase an expensive house you will have to make a larger sum of money as down payment or convince the seller to make some reduction in the price. Similarly, if the house costs lesser, the amount of money as down payment will be less.
It’s Personal
While you may be able to find great real estate deals online, make sure you don’t get carried away and rush into anything when applying for a mortgage. Only you know your financial situation which is the main thing to bear in mind when deciding to go with fixed or variable mortgage rate. Variable-rate mortgages can be risky for those who don’t have a high or constant income. If your financial situation fluctuates throughout the year, fixed rate may be the better option for you. If you are willing to take the risk, and believe that in the future the rates will go down, choosing the variable interest rate is the way to go. Especially nowadays, with all that economic turmoil going on choosing the variable interest rate can possibly save you some money.
Take Your Time
Last but not least, take your time. Do your research and homework and find out as much as possible about your possible lenders and what interest rates they offer. Use the internet as a source of information. Read about other people’s experiences, and ask yourself these questions: What monthly mortgage payment could you afford at the moment? If interest rates rise would you still be able to afford those payments? How long are you planning on living in the property? Either way you go, make sure you understand the consequences of your choices.
Keep in mind that making the decision to go with fixed or variable interest rate doesn’t have to be the last decision you’ll ever make, as you can always refinance your mortgage. Whatever you do, make sure you evaluate your personal situation as well as what’s going on in the market at the moment, taking into consideration all these factors will help you to make the right decision.
