Home Purchase Interest Rates-Which Type of Mortgage is Best?
Often when people start to consider buying a home, they are confused by the various interest rates that lending institutions offer. Quickly glancing at published rates will yield a range of possibilities, with the lowest rates looking ever so tempting. Acquiring a low interest rate can save you money or it may end up costing you some cash. Here are some interest rate basics that should be considered when making a home purchase.
Getting the Best Interest Rate
When making a home purchase in order to get the best interest rate buyers must perform research, ask questions and weigh the consequences of the choices with which they are presented. Low interest rates are very attractive but often they are introductory rates and they can carry upfront costs.
Adjustable Versus Fixed Interest Rates
There are two basic types of interest rates-fixed and adjustable. Fixed rates tend to be higher but they never change. That means that they can neither go up nor down. When buying a home, there are numerous variables and many home purchasers like knowing exactly how much their mortgage payment will be each month. That's one important aspect of a fixed rate home loan.Adjustable rates tend to be lower than fixed but they can fluctuate. An adjustable rate mortgage (ARM) will offer the buyer a low rate for a specified amount of time. It can be anything from one month to five years. During that time, the rate will stay the same.An ARM will have a designated time indicating how often the rate may change. A one-month ARM's interest rate can be altered every month, while a five-year ARM can change every five years. The manner in which they change is tied to two factors-the index and margin.
Mortgages that offer variable interest rates use a prescribed index from which the loan rate is calculated. One of various economic indexes is utilized for this purpose. The margin, the second part of the ARM, is also prescribed in the loan agreement. It may be one-half point, one-point or more. The interest rate is the sum of the index plus the margin. Thus, an initial home purchase with an ARM may include an interest rate of 4.00%, but that rate could go up or down during the adjustable period. Depending on how much you've borrowed a one-point adjustment can mean a fluctuation of $50, $75, $100 or more.
Are Points Worth It?
Buying points is one way to get a lower interest rate. One point on a 30-year fixed rate mortgage will lower the rate by 0.125%. The cost of a point is 1% of the loan amount. As an example, when buying a house, you may be able to get a loan with an interest rate of 7.50%. If the loan amount is $100,000, you'll have to pay $1,000 (1% of the loan amount) for each point. How much would this save on a 30-year loan? One-point lowers your rate from 7.50% ($699.21 per month) to 7.475% ($690.68 per month). The savings is $8.53 month. It would take 117 months or almost 10 years of mortgage payments for the homebuyer to break even on this deal. Depending on the term of the mortgage and how many points you purchase, it can take from five to 10 years for the purchase to payoff.
Introductory Interest Rates
Sometimes lenders will offer introductory interest rates that are exceptionally low. These rates, like adjustable interest rates, are offered for a limited amount of time and then go up to a predetermined rate that is fixed. This is a way to get a family into a home and established. It's important for the homebuyer to be realistic about the later fixed interest rate and their ability to meet the higher payments.
Special Programs
Often those who are buying a home for the first-time can meet the criteria for special programs that offer low interest rates. A home purchase that is connected to such a program usually has prescribed conditions that include limits on the price of the home and on the income of the home purchaser. Some of these programs require no money down.
Weigh Various Factors
When someone is buying a home, they must consider various factors, including affordability. Interest rates vary a lot and finding the mortgage with the interest rate that is right for you will greatly facilitate your home purchase. Shop around and get the rate that best meets your needs and pocketbook.