Buying a home is likely the biggest purchase one will make in a lifetime. Although there are people who buy homes with cash, most of us need a mortgage to purchase our primary residence. There are many mortgage options depending on where you live and what you hope to accomplish with home ownership.A big decision to make when selecting a mortgage would be choosing one with payments you can afford for the entire time you plan to own the property. In some circumstances, a variable rate mortgage could be a good option.
Variable vs Fixed Rate Mortgages
In the US, most mortgages today are of the fixed rate variety, usually with either a 15 or 30 year term, although shorter terms are available. With a fixed rate mortgage, the interest rate is locked in for the entire term of the loan. This makes payments stable throughout the life of the mortgage. While that works well when interest rates are on the rise, if rates decrease, you are still locked in unless you refinance. As seen after the housing bubble crash in the US, refinancing is not always possible.
In many countries, like Australia, Spain, or the UK, most mortgages are of the variable rate type, often with a short term fixed rate period in the beginning of the loan. After the fixed rate period, the rate can be renegotiated into a series of fixed rate terms or it could continue to vary. Variable term rates can be reviewable, which means they are determined by the lender or referenced, meaning they are determined by an index value, which is the most common from of rate variation in the US. Variable rate mortgages might also start with a period of interest only payments for a length of time before any principle payments are added to the total.
Variable rate mortgages can save homeowners a great deal of money on interest in the short term. This option is especially attractive for buyers who don’t plan on keeping the property for a long time.
If you do secure a variable rate mortgage with a short term fixed or interest only payment, make plans before the rate changes. Many homeowners made this mistake during the housing market correction in the US. Basing your finances on the lower, short term payment can cause problems if the rate adjusts upwards. If housing values have not risen over time, refinancing may not be possible due to lack of equity. In that case, a higher house payment becomes the new normal.
Best Tips for Obtaining Variable Rate Home Loans
Compare Lenders-With any mortgage, it’s always a wise idea to shop around and compare different lenders, like NPBS variable rate home loans. It might be surprising how different interest rates and fees might be between lenders, especially those with reviewable rates.
Increase Your Credit Score-In order to get approved for a mortgage and qualify for the best rates, you need to have a good credit score. Before applying, make sure your credit report has no errors and that you have no delinquent payments or other issues that might hurt your chances of getting a loan.
Don’t Stretch Your Budget Too Thin– If you don’t have a budget, first you need to set one up. Otherwise, it’s hard to account for the added expense of a mortgage and the costs associated with home ownership. If you do have a variable rate mortgage, make sure there is some cushion for payments that might increase. While home owners are often able to renegotiate the interest rate at the end of a fixed term, always plan that it might not be possible.
Home ownership is a huge decision from knowing what you can afford, finding the perfect home, then choosing the best lender. Whether your home loan has a fixed, variable, or combination rate, it is important to weigh all the options and make the best choices for your needs and budget.
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