Mortgage rates are at an all-time low these days, but that is about to change, according to most financial experts, who expect the Federal Reserve to begin increasing interest rates in response to America’s burgeoning national debt.
Right now is the time to lock in that low interest mortgage, to save yourself from rising interest rates and increased loan costs in the months and years ahead. But, how do you choose the right mortgage deal? It may not be as simple as choosing the one that offers the lowest interest rate. Other factors to consider include whether or not the loan being offered has a fixed or variable rate and how long the term on the loan is.
Fixed vs. Variable Rates
The most common low interest mortgage is the variable rate one. The reason the interest on these loans can be so low is because that rate isn’t going to last. Before you know it, your interest will be recalculated at a higher rate. How often this readjustment takes place and how high the rate can climb all depends on the type of adjustable rate loan to agree to.
For instance, the absolute lowest interest mortgage may contain a variable rate that readjusts every quarter, with o limitations. Or you may be offered a loan product that offers a very low introduction rate for a few years, only to be socked with double or triple that rate when the loan finally readjusts. Both of these scenarios can send your household budget into chaos.
Of course, not every variable rate is bad. Some offer a lower beginning rate, with annual increases up to a certain percentage. Then the rate becomes locked for the remainder of the loan term. This allows you to see how high your payments can become before they are finally locked in. In general, this is the safer variable rate loan to take on since there is a limit to how much interest your lender can charge. Loans without a cap feature an indefinite rate increase option for the lender to implement.
A fixed rate loan, on the other, may carry a higher interest rate from day one of the loan, but that rate is permanently fixed and can never go up. Therefore, the mortgage payment you owe in year one of your mortgage will be the same in year 29, no matter what happens to interest rates across the board. This can save you tens of thousands of dollars in interest payments over the life of the loan.
Shorter Loan Terms
Another way to get a low interest mortgage is to take a shorter loan term. Also offering both fixed and variable rates, a shorter term mortgage usually comes with a smaller interest rate simply because there is less risk for the lender. The odds are good that a borrower who takes out a 15 year loan will fulfill their payment obligation regardless of what happens in their financial life; but someone who runs into trouble in year three of a 30-year loan may opt to default. That risk comes with a price – a higher interest rate.
High Credit Scores
While we are discussing a lender’s risk in giving you a loan, let’s discuss the importance of keeping your credit score high in order to command a low interest mortgage rate. The fact is, the better your FICO score, the lower your APR will be on any loan, including your mortgage. Few people realize the impact a bad credit score can have on the interest rates they must pay. Keep your credit rating high and you can benefit from a cut-rate loan for years to come.
Using Your Equity
Finally, getting a low interest mortgage is more accessible if you have equity in your home. This can be achieved by either making a bigger down payment, or buying a home for less than its market value. Either way, that equity can be turned into a lower interest rate, since once again, the lender’s risk is lowered since they will likely be able to recoup their losses if a foreclosure happens down the line.
With interest rates low these days it may seem as if everyone qualifies for a low interest mortgage, but that simply is not the case. While the average interest rate may be lower than ever before, individual borrowers may still be quoted rates a percentage for two above that rate if their credit is poor; they have no equity in their home or they want to take out a loan term that is longer than the norm.
To qualify for a low interest mortgage consider the tips listed above and carefully investigate a variety of mortgage loans options with your lender to find a loan product to bets suit your current (and future) mortgage needs.