Mortgage Tips

Mortgage rates play a very important role when you are looking to finance your home purchase. There are different kinds of rates that you can opt for, though not all of them are offered by all lenders. You should do some research and shop around for the right mortgage rate for your situation. Here are the different kinds of rates commonly used in the industry.

Fixed Rate

Fixed rate mortgages are the most common in the industry. As the name suggests, the rate of interest remains the same throughout the loan period. This provides you stability in monthly payments and allows you to adjust your monthly budget accordingly. But fixed rates can turn out to be more expensive when taken for a long period, as the interest rates may fall and you would still be stuck with a high rate loan.

Variable Rate

A variable rate is adjusted according to changes in the market benchmark interest rate, which in turn depends on the economy. This kind of rate offers you the most flexibility. This means that you benefit from any fall in interest rates due to changing costs in the credit market. However, you also stand to lose when interest rates rise, as your monthly interest payments will increase. This kind of mortgage is not advisable for people with low income, who do not have sufficient financial cushion to absorb an increase in monthly payments.

Capped Rates

Capped mortgage rates are a hybrid of fixed and variable rates as they allow for a limited amount of fluctuation. These rates carry a minimum and maximum rate cap, so that despite the changes in the market, you won’t be made to pay more than a certain amount, nor will you be allowed to pay less than the minimum amount. This allows you to benefit from lower rates, while putting a limit to the risk that you are ready to take.

Discounted Rates

Sometimes lenders offer a discount on the interest rate. You can get a discount of up to 2% on the standard mortgage rate of the bank when some promotion is taking place. Most firms offering discount rates have a predetermined plan for an increase in rates after the discount period is over.

Split Rates

If you opt for a split rate mortgage, a portion of your mortgage has a fixed rate and the rest has a variable rate. When there is a change in benchmark rates, your payments for the part of the mortgage that is on a fixed rate stay the same while those for the variable rate part increase or decrease.

No matter what kind of rate you opt for, there are ways to get it reduced. The simplest way to get lower rates is by maintaining a good credit history. Though the lender would have some target rate depending on your credit history, you can always try and negotiate with the loan officer to get a better rate. You can also take assistance from mortgage brokers whose job is to find lower mortgage rates for their customers.