Mortgage Trend

Posts Tagged ‘economic predictions’

Most home-buyers require a mortgage, but the choice of mortgages available from lenders can sometimes be bewildering. It’s helpful, however, to remember that most mortgages can be divided into two categories; adjustable or fixed rate.

This article explains what adjustable and fixed rate mortgages are, and what factors you should consider when choosing between them.

Adjustable (or variable) mortgages:

With adjustable mortgages, the interest rate may vary over the course of the mortgage, although the rate may be capped so that it can’t go above a maximum level. Adjustable mortgages are sometimes referred to as variable rate mortgages. Whether the rate of interest goes up or down is generally tied to a base rate. (Note: In the US, there are a number of base indices used. An example is the 12 month Treasury Average Index.)

Put simply, the base rate will be determined by the state of the economy. For example, in times of inflation the base rate index is likely to be increased in an attempt to cool the economy. Once the base rate is raised, lenders will soon follow suit with mortgage rates. Conversely in low inflation periods the base rate will tend to fall, leading to lower mortgages rates for borrowers.

Fixed rate mortgages:

A fixed rate mortgage, as you’d expect from the name, has an interest rate that’s fixed, either for the duration of the mortgage or, more commonly, for a set period. For example, you frequently see mortgage deals such as 5 Year Fixed rate mortgage at 6%’ Once the fixed period has ended, the mortgage will typically revert to a standard variable rate.

Fixed or Variable which is best?

Which type of mortgage is best for you depends on your individual circumstances and on the prevailing economic predictions. A fixed rate is good if you think that rates are likely to go up, and has the added benefit of meaning that you know exactly how much you are going to need to pay for the duration of the fixed rate.

Of course the downside to fixed rates is that you’re stuck with that rate, no matter what the base rate does. So, for example, you could take out a 6% fixed rate, and consider it a good deal, but if rates have fallen to an average of 4% after two years, then you will be paying much more than someone who gambled on a variable rate mortgage.

Fixed rates have proved popular recently, as concerns over the mortgage market have caused borrowers to look for the peace of mind of knowing that their payments won’t go up. This may be a good call, but make sure that you shop around and make sure that you’re getting a market leading deal. And remember that price isn’t the only consideration. You may also want the flexibility of being able to overpay or make lump sum additional payments, and you should check to make sure there aren’t punitive charges should you choose to switch to another provider.