When deciding to become a homeowner, it is important to determine what you can afford both now and in the future, which can be tied to the mortgage rate.
Many lenders offer two mortgage options: a fixed rate or a variable rate mortgage. Often fixed-rate mortgages have a higher interest rate and many buyers choose this route when borrowing large sums of money.
Fixed rates, as the name implies, are constant and not subject change for the duration of the loan. The rate is guaranteed. A variable rate will fluctuate up and down based on the prime rate and at the lender’s discretion.
When deciding which type of mortgage you need it is important to understand what these changes could mean for you in the future.
What Causes Rates To Change?
There are many factors that cause mortgage rates to change if you are not locked into a certain rate. This can benefit the buyer during times of economic stability but can be detrimental at other times. Factors such as political scandals, elections, natural disasters, or another economic catastrophe can cause banks to raise their variable rates. This practice passes extra costs onto the consumer, i.e. you.
The Economy and Interest Rates: Linked or Not?
While the general state of the economy is a good indicator of whether variable rate mortgages will see an increase in interest rates, these two do not share a direct relationship.
For long-term loans such as mortgages, banks decide on interest rates based on data they see affecting their profit margins well into the future. Temporary economic instability may cause rates to rise. While temporary economic prosperity can cause rates to lower. Yet, inflation is a much better predictor of whether rates will change.
Which Loan Type is Right For Me?
Even if it’s not your first time buying a home, working with a knowledgeable mortgage professional can make difference in your financial future.
Individuals that have a good working relationship with their financial advisors, accountants and mortgage brokers, often have healthy financial goals.
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