How Do Mortgage Rates Affect Me?
A mortgage rate is the interest rate you'll pay on your mortgage loan. That rate varies with the type of mortgage loan product you select, so you'll want to carefully evaluate each offer to understand how much interest you can potentially pay – or avoid paying.
While some loan products have interest rates that are consistent throughout their lifetimes, others have interest that fluctuates during the lifetime or during a certain period of the loan.
What is a Fixed Mortgage Rate?
A fixed mortgage rate is consistent throughout the life of a loan. With a fixed-rate mortgage, you lock in a given interest rate, and it will not rise or fall regardless of fluctuating interest rates.
With a fixed mortgage, your payments are calculated to ensure that you pay off the loan amount in full, with interest, by the end of the loan's life. Fixed mortgage products are often considered the most traditional and stable loans in the market.
Video: Fixed Rate Mortgage
Cash-out refinance loans can be found with fixed rates. They can also be found with adjustable rates.
A cash-out refinance loan is when you take equity out of your home and refinance your mortgage to reflect that loan. You in essence take money out of your home's equity to use for your own personal reasons and then create a new home loan with that money added to what you previously owed.
National Average Mortgage Rate Chart:
What is an Adjustable Mortgage Rate?
An adjustable-rate mortgage has one major difference from fixed mortgages: Unlike fixed loans, adjustable-rate loans (or ARMs) have interest rates that adjust periodically throughout the life of the loan. These loans are tied to one of several indexes, which in turn cause the interest rate to fluctuate. Though rates typically rise, they can also fall.
Adjustable-rate mortgages typically carry lower introductory rates, known as teasers. However, these teaser rates will usually adjust by the first or second anniversary of the loan – and if the borrower is caught unaware, he or she can suffer from sticker shock. It is therefore important to understand the pluses and minuses of ARMs, as well as the caps that protect you from paying too much interest. ARMs typically cannot adjust more than 2 percentage points in a year, nor can they adjust more than 6 percent points during their lifetime.
Video: ARM - Adjustable Rate Mortgage Calculation
Mortgage rates differ depending on your state of residence. They can also differ from city to city, so your particular rate may be different from that of your nearby neighbors, if they don't live in your zip code. Rates differ for a variety of reasons, including competition for credit as well as home and land values in any given community.
Brokers Versus Banks
As you are researching your loan options, you may be wondering whether you should obtain your mortgage through a broker or a nationwide bank. Mortgage brokers may be able to find loans with more competitive interest rates, since they're able to compare loans from institutions across the country. They may also be able to find more flexible loan products to meet individual needs.
However, some borrowers may prefer going through a bank for their mortgage if they have a standing relationship with a particular financial institution. Banks with local ties may also be more likely to understand local property values. As with any other financial decision, evaluate your choices to make the best one for your needs.