Although you may be in a hurry to purchase the house that you have always wanted in a hurry, ensuring that you have the perfect mortgage is a long process. The first step is to assess your won financial condition, understand what you want and what you can afford. The second is to find a good broker who will take you through the legalities of finding a good mortgage deal. Brokers always give their clients a few options so that they can decide who they want to borrow money from and also at what rate. This is however the point where caution is needed.
Most brokers have agreements with money lenders whereby the broker would get a small commission if he pushes a client towards that one money lender. While listening to the views of a broker is important, it is also wise to do your own background check on the mortgage rate market.
If you are utterly new to this and show your inexperience in the same, chances are that you could end up paying a lot more than necessary. So why is deciding on the accurate interest rate for your mortgage deal, keeping in mind the house and the market rates so important? Simply because it is the interest rate that you would be paying back over the next few years along with the principal amount. The higher the rate, the longer it could take you to repay the whole sum.
Interest rates can be of two kinds. The first is the Fixed Rate Mortgage (FRM) where the interest rate remains fixed for the entire repayment period. The second is called Adjustable Rate Mortgage (ARM) where the interest rate is fixed for a small period and then subject to changes depending on the existing interest rate in the market etc. Both have their own advantages and disadvantages. FRM’s are generally preferred by people as the rate remains the same for the entire period of repayment and does not change or alter with changes in the market. Even if the interest rate is a bit higher than an ARM, your finances can be organized and planned much better. Expenses on a monthly basis can be planned out well in advance. This proves very beneficial to people who have a steady source of income also.
However, in a market where the price of property is never stable it makes sense to go for an ARM, in that way you would be able to capitalize on the declining rates and pay a lesser amount. However, whatever be your decision keep some points in mind. If you are going to go for an ARM, speak to the lender about having the same interest rate for a minimum period of 2 months. That would help you in stabilizing the finances a bit. Also, make sure that you keep a close eye on the market, so that you are aware of the rise and fall of interest rates. Having a clause in the contract, which allows you the flexibility of changing to a lower interest rate whenever applicable makes a lot of sense. That way you might be able to save a lot too.
Remember that irrespective of what the interest rate is, a mortgage loan can be cleared in two ways. The first is where the payment period is long and the monthly payment amount is small. The second is where the payment period is shorter which helps you pay your mortgage faster, and where the amount is huger. To decide which you should choose, you should be able first to assess your own financial condition. If you are certain that there will be a steady flow of income over the next few years, and your monthly expenses are not high, then go in for a shorter payment period. Also, leave some money for any event you may not foresee such as a death, a wedding etc. Any of these will again be a drain on your resources. However, in order to ease the payment a bit more, refinancing can be looked at as a good option.
Refinancing is defined as taking one a new debt, in order to restructure an old one. Here however, a new debt is taken when the rate of interest is declining, the intention being to take on another loan with a lower interest rate. So although you now have two loans to repay, there is money at hand to take care of the emergency. Here too, will come the dilemma of the kind of interest rate that should be paid. The same logic applies here too. If the condition of the market is such that the rate has fallen by a few points and is not likely to go down any further, it makes sense to go for an FRM. It is very unlikely that after the interest rates fall down by a few points that they would keep falling. A survey over the past few years, has only shown an increase in interest rates and property prices. However, whatever be the situation, making a decision fast and also locking in the rate is a must. Another important decision that has to be taken is to be clear about the amount of time, intended to stay on at the same place. It is a known fact that the longer you stay in a house, for a few years, the higher the equity would be; in other words the value would only increase. That too needs to be taken into account when applying for a refinance because it would be better for you to go for an FRM if the intention is to stay at the same place for a period of more than ten years. That would only help in giving you a stronger grip on your finances.
Some other factors also need to be looked at before settling on a refinance deal :
- There should be a difference between the rate that is being paid and the mortgage rates in the market.
- Whether there are any changes to income tax deductions if you opt for a lower interest rate?
- How much of cash do you really need? Be honest here because remember it needs to be paid back too.
- Whether you are keen on taking anther loan from the same money lender or from a different one? Also if you stick to the same person would there be any advantages?
- Lastly, should a longer period- lesser monthly payment or a shorter period- more monthly payment option be looked at?