What is the difference between a fixed-rate and variable-rate mortgage?

Not all mortgage rates are created equal. There are different types, and each has their own benefits, including:

• Fixed Rates

A fixed interest rate is one that remains the same throughout the entire time you are paying off the loan. The rate is predetermined, so if you like consistency and want to know exactly what you’ll be paying, this is the better option for you.

• Variable Rates

Variable rates fluctuate during the course of the loan based on the current index value. The rate can fluctuate, and go up or down depending on the market. People who want to try to save some money on their loan can opt for a variable rate. If the rate goes down, you’ll make a lower monthly payment for that period.

• Amortized

These rates are charged on an upward curve, meaning you pay less each month at the beginning of the loan and gradually increase your monthly payments as the loan progresses. The actual interest rate doesn’t change, but the total amount you pay will decrease because you will be paying off more of the loan as time goes on.

Is it important to compare mortgage rates?

Comparing mortgage rates is one way to save money on your home loan. If you accept the first offer you see, you may regret it later. With so much competition in the lending industry today, you can usually find a lower rate if you do a little price comparison. 

The easiest way to find low rates is to shop around. This is really easy in today’s internet-driven world. There are loan calculators, comparison tools, lender portals, and more all designed to help you line up offers to see which is giving you the right deal. 

How are mortgage rates set?

In simple terms, mortgage rates are set by the secondary mortgage market. This marketplace is where investors buy off mortgages from the lenders in order to receive a return on investment (i.e., your monthly payments+interest). The higher the interest rate, the more appealing it is to investors. However, too high, and potential borrowers won’t want to borrow from that lender. So, it is a balance between the two that sets the actual rates. Other factors include inflation, Federal Reserves prices, and US treasury rates.

The rate that you are given is dependent on several factors, including the lender, the value of the house, and your current financial situation. The most important factor, though, is your credit score. Your credit score doesn’t just determine whether or not you’ll qualify for a loan at all, but it also sets the bar for what type of interest rates you’ll be offered. The better your credit score, the better the interest rates you are going to see on offer. What qualifies as a good rate for someone with poor credit will not be considered a good rate for someone who has excellent credit.

Is the lowest rate always the right option?

As a matter of fact, the lowest rate doesn’t always indicate the right mortgage for you. There are various other factors to consider, such as the reputation of the lender, length of repayment plan, customer service, and other terms that apply to the loan. The combination of all of these factors will give you a good mortgage loan in general, and more importantly, the right loan for your specific situation. For example, someone who wants to take out a loan and pay it off over 30 years will not be well-served by a company that only offers 20-year repayment terms, even if it is offering competitive interest rates. Consider all the factors involved in the loan and not just the interest rate before deciding on a lender.