One of the most important decisions you will make in your financial life is which mortgage you should get. For many people, the option of a fixed rate mortgage seems appealing. But what exactly is a fixed rate mortgage, and why do so many people choose this option? If you are new to mortgages then this article will let you know a little more about fixed rate mortgages and their benefits.
What does fixed rate mean?
A fixed rate mortgage is fairly straightforward, and does exactly as the name suggests. A fixed rate mortgage has an interest rate that remains the same throughout the mortgage term, meaning that your monthly repayments will remain the same, allowing for inflation of course.
Why a fixed rate mortgage?
Many people choose fixed rate mortgages because of the security and peace of mind that they provide. If you have a fixed rate mortgage, then you know your monthly repayments will not change, meaning you can budget effectively for both the short and long term. If you have a mortgage with a variable rate of interest then your payments can change depending on market fluctuations. This can leave you paying less, but often leaves you paying more each month. The best times to get fixed rate mortgages are when competition is high, and the fixed interest rate is lower than that of the tracker or variable rate mortgages.
Are there any drawbacks?
There are drawbacks to getting a fixed rate mortgage. The biggest drawback is that the interest rate is usually higher than that of variable rate mortgages. The added security comes at a price, in that you have to pay more in interest over the length of the mortgage. Also, the fixed rate is usually only fixed for a certain number of years, usually 2 or 3, after which the rate can be put up and then fixed for another period. This can mean that your mortgage will be cheap now, but in the future the rate could rise.
Who should get fixed rate?
Despite its drawbacks, there are many people that should definitely opt for fixed rate mortgages. If you are on a tight budget and have a fixed income each month, then you cannot afford for your payments to rise. Having a fixed repayment each month means that you know you can make the payment even if national interest rates rise. Also, if you can get a deal whereby the starting interest rate is lower than that of a variable rate mortgage or even the same, then opt for the fixed rate mortgage.
How to decide?
If you are still unsure about whether or not a fixed rate mortgage is right for you, then consult an independent financial advisor. They will be able to help you find the best deal, as well as tell you whether or not the base interest rate is going to fall or rise. This will determine whether a fixed or variable rate mortgage is best for you.
One of the most important aspects of buying a property is the mortgage interest rate that you can obtain. After all your looking to borrow the amount required for your property for the lowest possible cost.
Standard variable rate is the typical rate of interest that lenders use and it is generally the most expensive option for the borrower. The standard variable rate is the rate of interest decided by the lender which maybe loosely connected to the Bank of England base rate by a margin normally around 2%.
If you are on a standard variable rate then you may notice that some lenders like to involve any rate increases with effect straight away. At any rate the standard variable rate is not the cheapest option available (based on circumstance). As a independent broker we can help you take advantage of any cut-price offers from other lenders.
A fixed rate is exactly as its called, the rate of interest is fixed over a certain period of time, generally between 1-5 years. Fixed rate mortgages are generally easier to manage since youll know how much is needed for the monthly repayments on your mortgage. The fixed rate mortgage is ideal for people who maybe under financial stress and need to know where they stand from cheque to pay cheque. Fixed rate mortgages are also suitable if interest are set to rise in the early years of a mortgage. Be aware that mortgage providers are usually one step ahead to adjust fixed rates accordingly. A Fixed rate mortgage means you could end up stuck with paying more then others if the interest rates fall below the figure youve adjusted yours to.
Discount rates are a percentage of the lenders variable rate, so your repayments will rise and fall in accordance with the lenders normal rate but you will be paying at a reduced rate over an according time period. This is ideal for first time buyers as a discounted mortgage can give you a few years of breathing space. A 1 -2% discount is very good if there is no lock in period afterwards, with the benefits of this come the ability to remortgage with another lender when the discount rate period draws to an end. Unfortunately you may often find you are locked in for another couple of years on the variable rate so you will not be able to get out of this sort of deal unless you are prepared to face huge redemption penalties. Discount mortgages offer good value for money – but only if there is no lock-in period once the discount has come to an end.
A capped rate will put a barrier to your interest rate you will pay over a certain period of time. If the lenders variable rate exceeds the capped rate then it is here you will benefit, but if the interest rate falls below the capped rate then you will paying the same as many others.
Capped rates will tie you into a mortgage for a certain period of time, usually between 1 and 5 years although recently there has been an introduction of capped mortgages for 25 year periods.
Capped rates give you a mix of advantages of the fixed rates and variable rates, again something is expected in return for this, the capped rate is likely to be higher than any fixed rate you can get. Like fixed rates the capped rate will make financial sense for those who are financially stricken.
Tracker rates tend to follow the Bank of Englands interest rate with a margin either above or below the rate, this is decided by the lender.
How will the interest be charged? Ignoring the type of interest rate you decide to go with one vital question to ask is how frequently is the interested calculated. If you decide to go for a mortgage where the interest is calculated daily then you will find yourself paying less interest over a period of time because every payment will reduce the amount you owe. Current account and flexible mortgages charge interest day by day. If interest is calculated monthly you could end up paying more and you can end up waiting a month after a payment is made before the interest is recalculated. But some lenders have their foot in the door by calculating the interest payable on the amount due at the start of the year and this could make a significant difference to the amount of capital reduction over 12 months. It also means that if you make an additional payment to reduce your mortgage it could be up to a year before this reduces the amount of interest you are charged.
You can compare mortgages by looking at the amount you need to pay every month. Dont be fooled by latest headline rates as they can be misleading as we know different companies charge different interest rates in different ways. The ideal target is a competitive interest rate that carries no redemption penalties so that it is cheaper to move your mortgage elsewhere if more attractive mortgages become available.
By law mortgage providers have to provide an Annual Percentage Rate (APR) for their products. It illustrates the true underlying interest rate, including all the charges, over the entire term of the loan. This means it adjusts for things such as annually charged interest. Comparing the APR of one loan against another can also help you get a better feel for which is the most competitive.
Adverse Credit Mortgages – Home Loans For People With Poor Credit
Mortgage lenders offer many financing options for people with adverse credit. For those who dont qualify for an A loan, you can use a B, C, or D loan to finance the purchase of your home.
These home loans offer short-term financing until your credit score improves and you can qualify for an A loan with lower interest rates.
Adverse Credit
Adverse credit is when you have a bankruptcy, foreclosure, or several late payments in your credit history. You can mitigate these marks on your credit report by including a letter explaining the circumstances. A health emergency or temporary job loss may help lenders over look your credit blemishes.
Large down payments can also help reduce your credit risk for lenders, qualifying you for an A loan. The propertys location is also a factor. However, even with poor credit, you can buy your home with a B, C, or D loan.
B, C, and D Loans
B, C, and D loans are based on your credit risk, which includes your credit score, income level, and down payment. So a B loan will have higher rates than an A loan, but lower rates than a C or D loan. While you cant change your credit number overnight, you can improve your lending factors and qualify for better rates by increasing your down payment and reducing your mortgage amount.
Short Term Solutions
Subprime financing, which includes B, C, and D loans, offers a short term solution until you improve your credit score. An adjustable rate mortgage (ARM) offers lower rates than a fix rate mortgage and makes sense if you plan to refinance for better rates and terms in the future. An ARM will have low rates for 1 to 7 years and then adjust after that period based on your loan terms.
If you find a good rate even with a subprime lender and you plan to spend several years in your home, you may decide a fixed-rate mortgage will save you money in the long run. Before you decide on either type of mortgage, be sure you compare the risk levels and interest costs over the long term.
Over the last few years, many people squeezed into new homes using adjustable rate mortgages. With interest rates going up, you now need a new interest rate strategy
Adjustable Rate Mortgages ARMs
Adjustable rate mortgages carry a bit of a gamble for home owners. Essentially, you trade smaller interest rates and lower initial payments on the gamble rates will not increase over time. If rates stay low, you make out like a bandit. If rates increase, you need to consider your options to avoid getting stuck with a high interest rate loan and resulting cash flow problems from increased monthly mortgage payments.
For the last three or four years, adjustable rate mortgages have been offered with incredibly low interest rates. Many people used these low, low, low rates to buy homes that would otherwise be beyond their means. Starting in 2004, Federal Reserve Chairman Alan Greenspan started making noises about increasing money borrowing rates. He has followed through on these hints. Although mortgage rates arent tied directly to the Federal Reserve Bank, they are heavily influenced by it. As a result, many people are now facing tight finances.
Avoid Rising Rates
There are really only two solutions for avoiding the increase in interest rates on adjustable rate mortgages. The first strategy is to immediately convert to a fixed rate mortgage product. Fixed rates are still at historic lows when compared to rates offered over the last 50 years. By flipping to a fixed rate, you will be able to solidify your budget and finances since you will know exactly what you have to pay each month. If rates decrease in the future, you can always try to flip back to an adjustable mortgage loan.
Unfortunately, some home owners are simply going to have to face the fact they lost one the interest rate gamble. Typically, this will occur when you realize you simply cant afford to make the monthly payments required by getting a fixed rate loan. In such a situation, you are going to have to sell your home and downsize. In most situations, it is better to do this now since youve probably built up a sizeable chunk of equity over the last few years and want to avoid a loss of that equity as the market cools down. While this may sound like a disaster, it really isnt. Yes, you have to downsize, but you should still have built up a chunk of equity.
Interest rates are going up whether you want to acknowledge it or not. The time to deal with your adjustable rate mortgage is now, not when you straining to make payments.
An effective tool used by home buyers, ARM or Adjustable Rate Mortgages, offers a lower interest rate at the beginning of the loan and the risk of a hike in rates is shared by the borrower and lender.
ARM, is ideal if you are certain about rising income expectations and short-term home ownership. There are four basic aspects. One is that the initial interest rate is fixed 1-3 percentage points lower than fixed rate mortgages. Second there is what is known as adjustment interval, when after the initial period has elapsed the rate is modified in keeping with prevalent rates. Third, an index against which lenders can measure the difference between the interest earned on the loan and what would be earned in actuality in other investments. And, fourth, the component added by the lender to the index, usually 1.5-2.5 percent.
An ARM has in addition, safeguards like interest rate caps. This limits the amount of interest rate that can be applied to the payment during adjustment. Normally this cap would be about 2% point cap over the life of the loan.
ARM is ideal when it lends you buying power. You can opt to buy a property with a higher value and still pay a lower initial monthly payment. If you know for certain that you will reside in the house you are buying for a maximum of 5-7 years then ARM is the mortgage that will save you money. If you are prepared to take risks then ARM offers the greatest possible savings especially if the rate stays steady or declines over the years.
ARM is a calculated risk as there are no certainties. However if at the end of five years your plans change and you are about to continue in the same home for another 10 years then it is prudent for you to switch from ARM to a fixed rate mortgage.
100% Financing Or No Down Payment & Bad Credit Mortgage Loans
Sub-prime lenders now offer financing packages with zero down. Interest rates are higher on these types of loans, but they make purchasing a house easier. And unlike a conventional loan, there is no private mortgage insurance required. There are two types of zero-down mortgage packages, each with their own requirements.
Types Of Zero-Down Loans
100% financing, as it names implies, offers complete financing of your property. The other option, 8020, finances your mortgage with two loans. Both loans may be carried by your lender, but sometimes the seller or a second lender is required to carry the 20% mortgage.
100% financing is easier to deal with, but not all lenders will offer this type of home loan. 8020 financing is more common, but takes some negotiation if the seller is involved.
Qualifications For Zero-Down
Each lender has their own criteria for determining who will qualify for a zero-down loan. Most sub-prime lenders require any bankruptcies or foreclosures to have been at least twelve months ago. A conventional loan requires these to be discharged two to four years ago.
While a credit score of 600 or higher is best, large cash reserves can also qualify you. Six to twelve months worth of cash reserves in the form of savings, money market, or other liquid assets are considered ideal.
If you choose 8020 financing with the seller carrying the second mortgage, you can qualify with sub-prime lenders with a score of 560.
Zero-Down Sub-prime Lenders
You can find zero-down sub-prime mortgages with both conventional and niche sub-prime lenders. Make sure that you request quotes from as many mortgage lenders has possible to be sure you find the lowest rate and best terms.
You will also want to decide what type of mortgage you want. An ARM is easier to qualify for and has lower rates. A fixed rate mortgage offers the security of a constant interest rate over the life of your loan.
Typically an ARM will be a better deal if you plan to refinance within a couple of years. After you have improved your credit history, you can refinance for a conventional mortgage with low interest rates.