Mortgage rates vary depending on several factors; this article will discuss how they vary depending on the type of mortgage one chooses.
Mortgage rates that depend on the lump sum of down payment vary according to this amount. Going for loan at a higher interest rate will cost one less now, but this is because the lender will be earning more in the future. Conversely, lower interest rates mean less cost in the future and thus the lender will have to make up for this deficit by charging more at the start. On approaching a lender for a mortgage, he will usually add his premium by adding it as part of the interest.
Other types of mortgage rates are based on the term of repayment rather than the down payment. Most people go for a fixed 30 year term. In this case, the loan is repaid by the borrower in 360 installments stretching over a period of 30 years. The monthly payment to be made is fixed at the beginning and these rates continue for the rest of the payment period until closing. Another similar mortgage is the 15 year fixed rate mortgage. In this case the repayment is for a period of 15 years in 180 monthly installments. Like the 30 year fixed mortgage, the rates to be paid for the entire repayment duration is fixed.
Another category is the adjustable rate mortgage. Here, the entry level charges are quite low compared to the above mentioned categories. The adjustable rate means that the rates are flexible and can be altered. But after the initial period of discount is over, the interest rates are adjusted to the prevailing market rates. In some mortgages, the interest rates are varied every year or 2, 5 and even 7 years. Often, the yield on a one year treasury bill is taken as a parameter for deciding the rates. In order to insulate both the borrower and the lender from wide market fluctuations, some lenders add a safety margin for movement of rates upwards and downwards. Thus, at the end of the repayment period, if the rates stay low, the borrower is the winner; if they go high, the lender will make the profit.
One more type of mortgage is the balloon mortgage. This is often taken for a short period of time. Here, the borrower repays part of the loan in monthly installments over a period of 5 to 7 years. At the end of this period, the remainder is to be paid off in a lump sum. The borrower also has the option of refinance for repayment of the remainder. He can select the amount of money to be repaid at the end of the period; some lenders even provide an option to vary the interest rates.
There are advantages to each these four types of mortgages – down payment, repayment, adjustable rate and balloon. For first time borrowers, it is important to seek advice and do research to find the right one.
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