Interest Rates for Home Loans

Interest Rates for Home Loans

What do you need to know about home loan interest rates? Let's talk about that.

Before you run off to purchase a new home you may want to educate yourself about the different type of home loan interest rates that are available. This first step can help save you both time and, most importantly, money.

What is a Fixed-Rate Mortgage?

With a fixed-rate mortgage, the interest rate is fixed for the life of the loan and the debt is amortized, or paid in equal monthly installments. The loan has a steady, flat payment month after month. Whether that amortization period is 30 years, 15 years, or even less, the payments remain constant until the balance becomes zero.

This fixed-rate mortgage is the type of loan for someone with no tolerance for movement in home loan interest rates, someone who invests in government bonds rather than volatile stocks and new ventures, someone who does not want to review the money rate section of the Wall Street Journal daily to figure out what the next mortgage payment will be. If you have a fixed income or one that does not move with the economy, this is your loan. Or if you are merely conservative by nature, this also is your type of home loan.

One of the nice features of home loan interest rates with a fixed-rate is that they are predictable. You have certainty that as the years go by, you will never have payment shock. What you paid in the first month of your home ownership is the same amount you will pay later when the roof on your home has been replaced once or twice.

What is an Adjustable Rate Mortgage?

With an adjustable-rate mortgage (ARM), the home loan interest rates are adjusted periodically to keep it consistent with changing market rates. It has a lower starting interest rate, easier qualifying, and is usually predictable. Bankers like this because the loan stays close to their cost of funds, a phenomenon referred to as marking to market. This allows banks or institutions the ability to match their assets to their liabilities.

The ARM is the loan for a good planner who has alternative sources of funds or disposable assets. Handling an adjustable-rate mortgage is really a cash-flow issue, so entrepreneurs who are adept at dealing with the cash fluctuations in a business are often well suited for home loan interest rates with an ARM. Also, it is a good loan if you expect windfall profits that will allow you to reduce the principle substantially, thereby lowering your monthly debt.

ARMs involve a teaser rate which makes the initial payments lower than normal home loan interest rates. This introductory rate is arbitrary and set by the lenders to lure you into a deal. Another advantage is that the ARM adjusts to the then-current balance, and one of the factors that influence the size of your payment is the ever decreasing balance for which the interest is charged.

In general, ARMs allow you to qualify for a higher loan amount. If you are in the early years of your career, an ARM may be the best route to your dream home.