The most confusing of all the steps in buying a home is probably deciding whether to choose a fixed or variable interest rate mortgage. Some lenders attract borrowers into variable interest rate plans with special offers that last for just 2-5 years. So, how do you decide between these two?
Variable Rate
Lenders and banks base their variable rates on indexes; for example, prime rate, treasury bills and Federal Reserve discount rate. To this figure a percentage or two is either added (which is most common) or deducted as a margin or points are charged. The net of these is charged as interest to you. This prime rate varies on a daily basis up or down - taking your interest rate with it.
Fixed Rate
Some buyers prefer the stability and predictability of a fixed rate to a variable interest rate, even if it's just a percentage or two more. The Truth in Lending Act requires that the rise in fixed rates be communicated to borrowers at least 15 days in advance.
However, once the special offer ends on the variable interest rate mortgage, borrowers usually forget to (or can't) refinance or move their mortgages and end up paying high interest rates. Variable rate mortgages are advantageous only when interest rates are low; however,these rates could overtake the fixed rate and you could end up paying even more that you originally planned.
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment