Understanding interest rates is an important part of finding the right mortgage for your home. Making informed financial decisions requires doing your homework; here are the basics of mortgage interest rates.
Mortgage interest rates come in two flavors: fixed rates and variable rates. Fixed interest rate mortgages do not change their interest rate for the duration of the loan. Adjustable rate mortgages change at regular intervals. Both types of interest rates have their pros and cons.
Fixed Rate Mortgages
The main advantage of a fixed rate mortgage is simply that this interest rate does not change. Homeowners with fixed interest rate mortgages have the peace of mind in knowing that their monthly payments will not change when interest rates go up. The disadvantage of a fixed rate loan is that these mortgages come with higher interest rates; you will pay a premium for this peace of mind.
Adjustable Rate Mortgages
Adjustable rate mortgages have the advantage of lower rates and monthly payments, at least initially. These loans typically come with an introductory period where the interest rate is very low; at the end of the introductory period the lender will adjust the interest rate to the current interest rate, plus their own markup. Adjustable interest rates are typically lower than fixed interest rate loans; however, when interest rates go up and the lender adjusts your mortgage you could see the monthly payments go up significantly. Adjustable rate mortgages are much riskier for the borrower than fixed rate mortgages.
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