Understanding Fluctuating Mortgage Rates And How To Position Yourself
02 Aug

Understanding Fluctuating Mortgage Rates And How To Position Yourself

A mortgage is an important type of borrowing – when people take out a mortgage they are taking out a loan that is secured by their home – if they are unable to make the repayments on the loan for any reason, then they can lose their house.

There are two types of mortgage – fixed rate mortgages and adjustable rate mortgages. Fixed rate mortgages are mortgages where the bank guarantees that the interest rate on the mortgage will not change and that therefore the amount that the borrower has to pay back each month will not change. This offers peace of mind that even if interest rates go up, the borrower won’t have to worry about how much they need to pay back – but it also means that if interest rates go down, they will end up having to pay back more than they expected.

Variable rate mortgages are often cheaper in the short term than fixed rate mortgages, but they are a gamble – if the interest rate goes up, then repayments could increase as well – to potentially financially crippling amounts. That’s why it’s important only to look at variable rate mortgages if you are certain that you have a lot of financial breathing space – and even then they are not usually a popular option. It’s better to take a fixed rate mortgage, then look at refinancing every few years if you have a really good credit rating, and you want to take advantage of better deals.

Adjustable rate mortgages can be valuable for a lot of borrowers. With adjustable rates, you are essentially hedging your bet. The mortgage is set at a low level for a fixed period, and then will reset after that low rate. This gives you a few years to start paying down the mortgage, and you could potentially refinance when the adjustable rate ‘fix’ ends if you don’t like what the new rate will be. The rates are usually set according to one of the main indexes such as the LIBOR or the COFI, but other indexes are used as well, and rates could reset every few years.

Some people take out interest-only mortgages, especially if they need lower repayments. With these, you enjoy a few years of low payments, but eventually, you will have to start paying both the principal and the interest – and if you do not either sell or refinance before that happens you could end up in a significant financial hole.

Balloon mortgages can be useful for some people too – with a balloon mortgage; a borrower takes out a loan with a shorter term, but when that term ends they have to make a lump sum payment to clear the balance – if they can’t do that, they will need to refinance. This can be a significant expense, but it is an option for people who have low outgoings and who can pay off their mortgages relatively quickly compared to a standard 30-year term.

Balloon mortgages can be useful for some people too – with a balloon mortgage; a borrower takes out a loan with a shorter term, but when that term ends they have to make a lump sum payment to clear the balance – if they can’t do that, they will need to refinance. This can be a significant expense, but it is an option for people who have low outgoings and who can pay off their mortgages relatively quickly compared to a standard 30-year term.

If all of this is confusing or you want a great rate contact the Sherwood Mortgage Group today and take advantage of their great service.