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Anyone who has ever sat down across the desk from a banker or mortgage broker has experienced that moment of confusion and anxiety when they are asked that dreaded question “Do you want a fixed or a variable rate mortgage?” Why the anxiety? It’s probably because, even if you do know the difference between the two, odds are you have no clue which will be the better fit for you.
The fact is, most people applying for a mortgage end up asking their banker which one they think is best. While asking a professional their opinion is a smart thing to do, they won’t know your personal situation as well as you do. This is why it is so important for you to know your facts inside and out before you sit down to discuss your options so that you can take their advice and fit it with your individual needs.
There are a lot of mortgage options out there and it can get very overwhelming when they are all laid out in front of you. Banking matters, in general, tend to be very confusing to most of us and negotiating a mortgage is no exception. Have no fear though, because we are here to help you negotiate those nerve-wracking decisions with ease. There’s no need to sweat it.
One of the biggest challenges for most people who are about to discuss mortgage options with a professional is understanding what is being said. Whether it’s your first time applying, or one of several mortgage refinances you may experience in your lifetime, the language can be confusing. When it comes to mortgage interest rates, all of those different terms basically boil down to two possible options for you. Here is a quick key to understanding what they are.
A Fixed Rate Mortgage has an interest rate that will remain the same during the full term of your loan or until you renegotiate your agreement. This means that your interest rate will not change regardless of any fluctuations in the market that take place. Your payments will stay the same throughout the term of the loan no matter what happens with the economy and that can be very beneficial.
A Variable Rate Mortgage, sometimes called an adjustable-rate mortgage or a tracker mortgage has an interest rate that is adjusted periodically depending on market trends at the time. These rates are determined by fluctuations in the market, such as various economic factors, that can affect the cost to the lender of holding the loan. With these loans, your payments will either increase or decrease periodically. These mortgages can either really cost, or really benefit you.
The trick is knowing how these market trends fluctuate and making an educated decision based on that understanding. Nothing is without risk, but there are times that a variable rate mortgage will be the absolute smartest choice and there are times it is better not to take the risk. One very important term you will hear is “prime rate” and it will have a major impact on your choice. Why is that? Here’s the scoop on prime mortgage rates.
The Prime Mortgage Rate is not a type of mortgage, but it is a term you will want to know. “Prime” is the standard rate of interest charged to low-risk customers with good credit. Consider it a base interest rate. It is affected by factors such as the rate of unemployment, inflation, and other factors that have an impact on the economy. It is considered the standard rate a bank needs to charge in order to cover the costs of holding the loan.
The prime rate is used as a starting point and you will be offered a rate that is a certain percentage + or – prime. If your banker starts talking about your rate being “above” or “below” prime, that is what they are referring to. If you are offered a rate above prime, that means there is more of a risk involved in giving you the loan, whether it be your credit, income level, or debt ratio. This extra charge above prime is put in place to minimize the bank’s losses if you were to default on your loan.
While the prime rate set by the Federal Reserve is universal, not all banks offer that as their prime rate. This rate is simply an indicator of how much it is costing your lender to carry your loan. Beyond that, it is up to each individual institution to set the rates that they consider to be prime. There are many reasons for this, but the point is that it is important to compare prime rates between different banks before to decide on one.
Knowing what the best offers out there are may not only give you more options when it comes to choosing a bank, but it can also help you as a tool for negotiating an even better deal. A little bit of knowledge is a great thing to have when going to meet with your mortgage professional and can make all the difference in the world when it comes to the deal you walk out with.
If the cost of lending is high when you negotiate your loan, getting a variable rate mortgage means that you could save some of your hard-earned money if interest rates are to drop later. It is a good idea to take a look at the prime rates over a good period of time to get a feel for how they tend to fluctuate and when they are likely to go higher or drop a little.
A variable rate mortgage can save money, at least in the short term, because lenders will charge more for fixed-rate mortgages. This is to cover their own potential losses if the cost of holding the loan increases significantly and they can’t charge you more to make up for that extra cost. If mortgage rates stay low, you could save a lot of money in the long run.
If you negotiate your mortgage when interest rates are low, you may end up paying a lot more than you agreed to if the rates go up at some point in the future. It may not be a huge issue if the fluctuation is small, but if there is a big hit to the economy your rate could go up significantly. No one wants to negotiate a great variable rate mortgage deal only to have the payments skyrocket unexpectedly. That could add up to some pretty big losses.
Also, a variable rate mortgage says it all in the name. Your rate will change periodically, and that could seriously impact your budgeting. With a fixed-rate mortgage, your payments will always be the same so you won’t have to spend valuable time adjusting your monthly budget. Having the security of a set payment every month or every two weeks, depending on your payment schedule, can be a big stress reliever.
Making a choice between a fixed rate and a variable rate mortgage is really not very different from playing the stock market. There are risks, but if you research the recent trends in the current mortgage rates, you will be better prepared to make an informed choice. If the market seems very unstable, or if the prime lending rate is low, you may want to lock it in for the term of your contract. If the market seems nice and steady, or if the lending rate is high, you may want to opt for a variable rate mortgage that will possibly lower your payments as the market shifts.
There are a lot of great tools online that can help you research prime rate trends so that you can get a good idea of where the market is, where it has been, and where it is likely to go. Nothing is certain of course, but taking a look at these trends can help you make a more informed decision. Don’t let yourself get overwhelmed. There is no end of news stories out there predicting the trends of the prime rate. Take a look at a few of them, take it all under consideration, and go with whatever choice feels best to you.
While you should definitely do your research and come to the table with a good understanding of your options, it is still advisable to ask your banker questions. Knowing the market trends and how to give you the best deal is what they do for a living. It is safe to assume that they have some knowledge that you don’t have. Asking questions and getting advice is very different from blindly accepting what you are told.
In addition, your banker will probably be thrilled to offer advice to someone who has already done some of their own homework. Despite what some people might think, your bank is not out to see you fail. Working with you to make sure you succeed is far more profitable to them than having you default on a loan. Your lending professional is a great resource in your corner, so be sure to use it.
Now that you have some handy information in your toolbelt, you can go into your meeting with a lot more confidence. No one likes to feel like they don’t understand what is being talked about, especially when you are being asked to make decisions about something as important as your mortgage. Your mortgage rate can have a huge impact on your and your family’s lifestyle and that is a lot of pressure to carry with you. Knowing you have gotten the very best deal you can go a long way to giving you peace of mind.
The most important thing to remember is that your banker is there to work with you and to answer any questions you might have. Don’t hesitate to ask, because there really is no such thing as a stupid question. That mixed with a little research and knowledge will go a long way to getting you the very best deal possible, whether it is a fixed rate or a variable rate mortgage. You have a lot of great options, so don’t worry. Just focus on what works best for you and enjoy your new home with the satisfaction of knowing you did all you could to create your best possible future.
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