Achieving Home Ownership
If you have dreamed of owning your own house or flat, you may wonder how you will be able to afford the purchase price for the home of your dreams. The fact is that unless you are independently wealthy or you win the lottery, you will need to obtain a mortgage to help finance the purchase of your new home. In the United Kingdom, you have a choice between fixed rate and variable rate mortgages. Choosing between these two home financing strategies requires you to make an honest assessment of your personal circumstances, as well as speculate about future financial and housing market conditions.
How Fixed Rate Mortgages Work
Fixed rate mortgages have a set interest rate that remains the same for the entire term o the mortgage. In the UK, fixed rate mortgages are commonly set for two-year terms or five-year terms. Fixed rate mortgages hold appeal during periods when interest rates in general and mortgage rates in particular are rising or are set to rise in the near future. This is because homeowners are protected against spikes in interest rates caused by political, social and financial conditions.
Lower mortgage interest rates are usually available for shorter fixed rate periods than for longer fixed rate periods. Potential homebuyers who can post larger payments or homeowners with a larger equity in their homes are often eligible for lower interest rates. Borrowers with better credit ratings can also often qualify for lower interest rates on fixed-rate mortgages than borrowers with poor credit.
However, the tradeoff is that homeowners are locked into the mortgages for the entire term of the fixed mortgage. If homeowners need or want to sell their homes before the term of the mortgage expires, they will be forced to pay financial penalties, which are sometimes substantial. Homeowners and potential homeowners must also watch out for large upfront fees attached to super low mortgage interest rates that can eat up much if not all of any savings that might not otherwise be realized.
How Variable Rate Mortgages Work
Variable rate mortgages will vary based on benchmarks such as the interest rate set by the national treasury. The initial rate or variable rate mortgages is often quite low, but can rise considerably based on the interest rate of the financial benchmark set by the lender. If the homeowner retains the mortgage long enough, it is likely that he or she will pay more in interest than would have been payable under a fixed rate mortgage or the same period o time. However, if mortgage rates are falling or due to fall soon, the interest rates on variable rate mortgages fall also, which can result in homeowners effectively receiving nearly free money loans during periods when interest rates are low.
Unlike fixed-rate mortgages, variable-rate mortgages do not lock homeowners into a mortgage. Homeowners can sell their homes at any time with no risk of incurring early payment penalties. As a result, homeowners who do not plan to remain in their homes or long periods of time, as well as homeowners who purchase homes for investment purposes often find variable rate mortgages appealing.
Which Mortgage Is Right for You?
In determining whether a fixed rate mortgage or an adjustable rate mortgage is right for you, there are many factors to consider, including the prevailing interest rates and trends that indicate whether interest rates are rising or falling. You should also consider how long you intend to remain in the home.
Most importantly, you should take an honest assessment of your personal finances. Can you afford to pay hefty up front fees to qualify for the lowest rate for fixed rate mortgages? Can you afford the monthly payment amounts that are assigned to the mortgage at present? Could you still afford monthly payments if interest rates rose significantly during the next few years?
In general, if you intend to remain in the home for the next several years and if interest rates are steady or rising, fixed rate mortgages provide stability and protection against large spikes in interest rates. However, if interest rates are falling or you intend to remain only for a short period of time, variable rate mortgages make the most sense. If you are uncertain about the best choice, consulting with a financial or real estate professional can provide the guidance you need to make the right decision.
Sam Jones the author of this article suggests that when looking for information comparing a fixed rate or variable rate mortgages, the website http://www.uswitch.com/mortgages/mortgage-guide/fixed-rate-or-variable-rate-mortgages/ from uSwitch is the most up to date.
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