Tips for Better Mortgage Rates: Understand Rate Basics
Tips for Better Mortgage Rates Work Best If You Have a Clear Idea of the Best Rates and How They Will Work for You. Read These Tips to Understand Mortgage Rates and Get a Better Deal.
Tips for Better Mortgage Rates
If you’re new to thinking about mortgages, one of the most confusing things to figure out is what makes a better mortgage rate. You get that a lower mortgage interest rate means lower payments each month, but that’s not the only variable you have to consider even when you’re only considering the rate. This can make tips for better mortgage rates less useful. Whether you realize that juts minimizing your interest rate is an incomplete strategy or you’re concerned with long term financial planning, if this confusion applies to you then these tips for understanding what makes better mortgages rates for you can help.
Mortgage Rate Basics: Fixed vs. Adjustable
This is usually the secondary variable, after the percentage itself, that people say you need to understand to find the best mortgage for you and utilize tips for better mortgage rates. A fixed-rate mortgage (often referred to as FRM) means you pay the exact same interest rate for the entire life of the loan, so once you sort everything out and assuming you don’t miss any dates, you’ll be making the same monthly payment for 15 or 30 years or however long the schedule is. This is the easiest loan to understand because your mortgage and mortgage payments won’t change unless you refinance.
Adjustable-rate mortgages (ARM) are just that. Your mortgage rate is adjustable. Instead of locking in a rate when you sign, your rate will fluctuate with the market by following the changes of one of a few specific, benchmark rates. Your contract and negotiations will determine which of these it follows and how many percentage points it will stay above that rate, so you’ll always know where your rate should be as long as you keep track of how the bench-mark rate is behaving. These loans are more of a gamble because you don’t know where they will be in the future.
There are a few difference that make the comparison more complex. FRM rates are usually higher than the current ARM rate because banks have to hedge against rates going up in the future and the chance that they’ll lose out on potential income in the future. So ARM rates are typically a bit lower than those of FRMs. This means that if you get an ARM, your rates will be lower now so you’ll have lower payments for the near future. This can be an advantage if you plan on moving in a few years, at which point you’d just pay off the rest of your loan using some of the money you make selling the house anyway, so the higher future rates don’t matter. However, those who are going to be in their homes for the life of the loan will almost certainly pay less to service their loan if rates go up, which is a natural expectation.
Benchmark Rates and Trends
Another thing to consider when finding the best rate for you is how it matches up to the rest of the market. A better rate is generally the lowest rate that you can afford to qualify for or negotiate now, so comparable loans from other banks create the context to help you figure out what the best offer you can get is. This gets more complicated because different types of loans, such as a 5/1 ARM – a loan in which you pay a fixed rate for the first five (the 5) years and then the rate becomes adjustable, in this case adjusting every year (the 1) to match the prevailing rate – compared to a standard ARM, vary in ways that make it difficult to see how they match up. This is why it’s always useful to know what benchmark rates are for 15-year and 30-year FRMs, as well popular standards like the LIBOR (London Interbank Offering Rate) that serve as the foundation that banks use to figure out what deals to offer you.
Fees and Rates
Typically, the lower the rate you want, the more you have to pay the bank in discount points, which is just a confusing name for fees you pay up front. They measure them as a percentage of the value of the loan, so fees should typically total below two discount points at signing. This is different than money down, which is cash you pay towards the home to decrease the amount of loans you need to pay the price of the home.
The tradeoff between points and mortgage rates represents a simple problem; do you want to save money in the future and pay for it now or the reverse? This is a smaller version of the decision between fixed and variable rates, albeit with more predictability. Paying more is one of the easiest ways to ensure a lower rate down the road, but if you can’t afford it now and know you will be able to make slightly bigger payments each month, you might not have the option. In that case, the best rate for you is actually slightly higher. The same goes for your down payment, although with that at least you’re getting immediate equity in the home instead of throwing it away to cover bank charges.
Tips for better mortgage rates are obviously useful, but they’re only as good as your ability to understand what kinds of mortgage rates and deals fit your goals and budget.