March 23, 2018

Understanding Mortgage Rates

When you’re buying a home or refinancing your home loan, the mortgage rate may possibly win out as the most critical piece of information in the deal. The rate refers to the interest rate over time, what you pay for borrowing the money.

Common types of mortgage rates:

  • Adjustable Rate Mortgage
  • Fixed Rate Mortgage

These products describe certain types of interest rates and how they typically are designed to behave over time.

Adjustable Rate Mortgage

Adjustable Rate Mortgage or ARM, offers you a low introductory interest rate at the beginning of your loan, for a predetermined period of time. After that time your loan adjusts periodically to match the market rate—the adjustment period. Depending on the terms of your loan, your adjustment period varies. It could be one month or it could be one year.

Because there is a risk that uncontrolled interest rates could climb, ballooning your home payment, some ARMS come bundled with a “cap,” or limit on how high your interest rate can actually climb. This is a type of built in safety measure designed to ensure your mortgage rate remains within reasonable bounds. It’s important that if you’re discussing an ARM with your real estate agent and mortgage lender that you know exactly what your terms will be, including your initial mortgage rate, adjustment period, penalties for early pay-off, and other features.

Fixed Rate Mortgage

Fixed Rate mortgages are exactly what they sound like: the interest rate on your home loan stays the same throughout the life of your loan. If you’re looking for consistency and a monthly mortgage payment you can always anticipate, then this is a good rate to consider. A 30-year mortgage is a typical term for a fixed rate mortgage, but given high housing prices, many terms may be longer.

Historical Mortgage Rates

This isn’t the type of “history” you study in school, but the financial record of mortgage rates over the recent or distant past juxtaposed against various indices. Some financial analysts and savvy home buyers may leverage the information available in historical mortgage rate data to make informed decisions about the type of mortgage rate that might benefit them most.

To make the most of this historical data you should make sure you ask your lender what rate index it uses to calculate your mortgage rate. Then you can use the data available to make a more accurate choice.

Mortgage Rate Calculators

You’ve likely seen the ubiquitous mortgage rate calculators that dot many websites. What are they and how do they work?

Many websites that offer mortgage information or access to mortgage loan resources, might also offer you a convenient mortgage rate calculator. These simple tools take basic data regarding your mortgage loan or proposed mortgage loan, and spin it into estimated values that only approximate the actual loan rate and payments. Use these tools only to get ball-park estimates and don’t hinge your hopes to the results they give you.

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