How Your Mortgage Affects Interest Rates

When purchasing a new Auburn Bay home, buyers have a lot of things they need to keep in mind - one of which is their finances. Interest rates can vary wildly depending on choices the buyer makes, and those interest rates can add a lot of extra costs to what they’re already paying. Before settling on the type of loan a buyer wants, they need to understand interest and what affects it.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

How Interest is Determined

When someone purchases a home, they first put a down payment on it. This down payment can be anywhere from 5-20%, and it exists to build equity and provide proof to the lender the new homeowner isn’t likely to default on their loan. How much money a buyer puts down on their home is a large factor in how much interest they will pay. The larger the down payment, the lower the interest. Other factors influencing interest rates are the amount of money the loan is for, the type of loan, and even the country’s economy.

Fixed-Rate Loans

When a buyer uses a fixed-rate loan, it means the interest rate will remain the same throughout the loan’s lifespan, regardless of how many years it will last. This is a good option for buyers who don’t want to worry about their interest rates rising over time. It can also be a good idea if economists are predicting a recession, which could cause interest rates to rise. When choosing a fixed-rate loan, buyers need to inquire about breakage costs and penalties. Some lenders will charge buyers money if they pay off the loan early, so buyers need to be aware of their lender’s policies regarding fixed-rate loans.

Variable-Rate Mortgages

While fixed-rate loans keep the same interest, variable rate-mortgages have fluctuating interest, depending on the economy.  Variable-rate mortgage interest can increase or decrease, so it’s possible for homeowners to pay more or less money in interest. There is an equal chance of a variable-rate mortgage being more or less expensive than a fixed-rate mortgage, so there’s no way for buyers to know which option will be better for them. A buyer can try to research the market and look for predictions from experts, but there’s no guaranteed way to find out if a variable-rate mortgage will be better or worse than a fixed-rate mortgage.

Open and Closed Mortgages

Open mortgages allow a homeowner to pay off their home loan at anytime without having to face any sort of penalty. They’re extremely flexible, but because of that, they also typically have higher interest rates. On the other hand, a closed mortgage is more likely to have lower interest rates, but they’re a lot less flexible. When a buyer signs with a lender, the lender will have its own unique policies for how quickly or slowly the buyer is allowed to pay off their loan. If they do it too slowly or too quickly, they’ll incur penalties and fines. If the buyer signs an agreement for a closed 15-year mortgage, they’re expected to take exactly 15 years to pay it off.

Understanding finances is extremely important when purchasing a new home. Choosing a mortgage or how much the down payment is going to be can affect the interest rates the buyer will need to pay down the road. Before the buyer agrees to sign with any lender, they need to know exactly what the lender’s policies are regarding interest and their mortgage.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.