Types of Mortgages

A mortgage rate is the interest the lender charges you on your home loan. This rate can take one of two forms; either fixed, or variable. A fixed mortgage rate is a set rate that does not change for the life of the loan; a variable rate fluctuates over time and is tied to the prime rate plus a percentage.

A variable rate mortgage usually carries a lower “teaser” interest rate than a fixed mortgage; however, that lower rate is usually only for a short period of time, such a six months to a year. The rate will then rise to a market rate.

Whether a variable or fixed rate is best depends on the current mortgage rate. If the interest rate is currently very low, it is advantageous to obtain a fixed rate mortgage, so as to lock in the lowest possible rate. If the interest rate is currently high, it is best to either wait until it drops, or obtain a variable rate mortgage so that you will be able to benefit when rates do eventually drop.

Interest rates rise when the country’s economy is improving; they drop when the economy is stalled. Ironically, the best time to make an investment in a home, probably the largest investment you will ever make, is when the economy is poor.

Getting the best rate can mean a savings of hundreds of dollars in your monthly payment, and tens of thousands of dollars in interest over the lifetime of the loan.

Mortgage interest rates are not directly decided by the Federal Reserve Board, although in reality, the Fed’s action is what lenders base their decisions on when they decide the interest rates they will charge. Due to the fact that mortgage rates change so frequently, the Fed may find it necessary to make changes several times a year. Each lender may also raise or lower their individual interest rates on a daily basis. Watch the trends and the economy when considering a mortgage so you can get the best rate possible.