When it comes to mortgages, the Holy Grail for all borrowers is the fixed rate loan agreement. As its name implies, a fixed rate loan has an interest rate that doesnt change over time. Even if the market and world economy dictates that the bank should be charging you double the interest that your current rate specifies, you will still continue to pay that original rate until the balance is repaid in full. The only exception would be if you continued to miss or make late payments on the agreement, at which point the loan interest rate would likely increase to the maximum amount by law.
Because fixed rate mortgages are so risky for lending organizations, they are also significantly rarer than the alternative: the variable rate mortgage. Just because your bank has agreed to give you a variable rate mortgage doesnt mean that youve lost the position of power. So long as you know exactly what you can expect and what to watch out for when entering into a mortgage agreement, you can help make sure that every last bit of your hard earned money is going to the right place.
When shopping around for a variable rate mortgage, the first factor that you want to consider are the incentives that a bank will use to get you to enter into just such an agreement. Oftentimes these incentives will come by way of a dramatically reduced starting interest rate that continues on for a period of a year or more. However, all is not necessarily as it seems. You need to keep in mind not only when that introductory interest rate expires, but what the rate will increase to when the inevitable occurs. Just because youre saving a lot of money in the short term with a low introductory rate doesnt mean that the bank wont make all of that money back when your rate eventually increases. When all factors are considered, a loan that initially looked to be quite favorable could actually be very trying financially if you dont pay attention to just the right bits of information.
If the only portion of a particular loan agreement that is actually enticing is the introductory interest rate, you likely should consider other agreements or even other financial institutions.
The next factor that you need to consider when looking for a variable rate mortgage is just how often your rate will change. The point where your variable interest rate stays the same is called the amortization period. When the amortization period ends, your financial institution will reassess your mortgage and decide if your interest rate needs to increase, decrease or in some cases stay the same. Oftentimes variable rate mortgages will change once per year, though certain financial institutions have agreements that can see an interest rate change as frequently as every six months. Certain institutions may have longer amortization periods at two or even three years or longer. The specifics of your loan agreement will depend largely on the bank that you signed up for the mortgage with in the first place.
Its also important to realize that variable rate mortgages actually have a number of key benefits that fixed rate mortgages dont have. If the current economic situation dictates that banks should be charging a lower interest rate than what you are currently paying, you will get that new lower rate at the time your rate is recalculated. If economic conditions are positive for a long period of time, you could actually end up spending a lot less money over the life of a mortgage agreement than someone who locked in a fixed rate mortgage at a higher rate.
The final factor that you need to look for in a variable rate mortgage is what will happen if you happen to miss a payment or pay late. Nobody plans on missing mortgage payments. Sometimes, however, life gets in the way. If your car broke down very suddenly and you need it to get to work, for example, you may determine that your money is best spent fixing the car and making a late mortgage payment. Because the interest rate is variable, you may see an interest rate increase happen immediately upon the date a payment is considered â€œlate.â€
Sam Jones the author of this article suggests that when looking for information comparing a variable rate mortgage, 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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