UNDERSTANDING MORTGAGE RATES

Understanding how to get the lowest possible rate and the cost of your loan in general starts with understanding a few key factors that go into calculating your quote.

Interest Rates

Interest is what it will cost you to borrow money. Interest rates can change hourly, daily, or weekly — mostly depending on the state of the economy. Interest rates also vary depending on the type of mortgages and the amount you are borrowing compared to the value of the home. Whether the home will be a primary or secondary residence can also affect the interest rate. Other factors that come into play are your income, credit history, credit score and your employment history. Lately, interest rates have been at historic lows to encourage more Americans to buy homes and stimulate the economy. That makes now a great time to buy a new home or to refinance your current one.

Fixed- vs Variable-Rate Mortgages

What is a Fixed-Rate Mortgage?

Having a fixed-rate mortgage means your interest rate stays the same through the life of your mortgage (unless you sell or refinance your home). This is often a good option if you want to live in your house for a long period of time.

A fixed-rate mortgage is perfectly predictable because you never have to worry about your interest rate or your mortgage payments going up. That means they are easy to budget for over the long term (usually 15 or 30 years) and are typically a great choice if you:

• Are a first-time homebuyer

• Need a predictable payment

• Are buying your home during a period of low interest rates

• Intend to keep your home for more than five years

What is a Variable-Rate Mortgage?

An ARM, short for "adjustable rate mortgage" or “variable-rate mortgage,” is a mortgage where the interest rate is not fixed for the entire life of the loan. The rate is fixed for a specified period at the beginning, called the "initial rate period." It will later change based on the interest rate index, usually in response to changes in the Treasury Bill rate or the prime rate. The rate adjusts to bring the interest rate on the mortgage in line with market rates. The borrower is protected by a maximum interest rate (called a ceiling), which can reset periodically.

Variable-rate mortgages, also known as adjustable-rate mortgages (ARMs), are more complicated than fixed-rate mortgages. Their initial interest rate will usually be lower than a fixed-rate mortgage. However, the interest rate of the mortgage will change over time, and as a result, your payments may go up or down accordingly. They may be ideal for you if you:

• Don't expect to own your home for more than five years

• Want the lowest initial interest rate possible and are willing to possibly pay higher rates down the road

• Expect to eventually make a higher salary

• Expect interest rates to decline