There is a lot of jargon out there when it comes to mortgages and you need to understand all of this when you compare mortgage rates. It is important that you are comparing like with like otherwise you may think you have found the best deal only to face a lot of additional charges that you had not bargained for.
To be able to compare mortgage rates successfully you need to understand the different types of mortgages available and decide on which one is best for you.
Fixed Rate Mortgages
This is the most popular kind of mortgage. The main reason is that you pay the same amount every month even while the interest and the principal amount changes during the loan term. When you accept a fixed rate mortgage you lock in your interest rate which will not change. So be sure to compare mortgage rates of fixed rate home loans with other fixed rate loans.
The only downside to a fixed rate mortgage is that you will still have to pay the higher rate of interest if interest rates go down. But you have protection from interest rates going up which is better. You will need a good credit score for a fixed rate mortgage and the repayment periods are usually 10, 15 or 30 years.
Compare Mortgage Rates – Adjustable Rate Mortgages
There are a few benefits with adjustable rate mortgages such as your down payment is usually lower and the initial interest rates are normally lower which means your initial repayments are lower. There is normally a specified amount of time where the interest rate is constant and if you go for a shorter period you can get a lower rate.
The problem with adjustable rate mortgages is the impact that general interest rate rises can have on your repayments. It may get to a position where you are unable to make your repayments. There are hybrid mortgages which combine fixed rate with adjustable rates. So for example in the first 5 years you pay the fixed rate and the next 25 years the adjustable rate.
Interest Only Mortgages
These are adjustable rate mortgages where you will initially just pay back the interest on the loan. This makes the repayments lower to start with which suits some people. Once you have paid off the interest then your repayments will jump up as you start to repay the principal amount.
When you Compare Mortgage Rates don’t just use the APR
A lot of borrowers just compare the APR (Annual Percentage Rate) offered by the various lenders. Hey then go with the lender that offers the lowest APR. What is wrong with this? Well you never quite know if you are comparing like with like if you just go for an APR comparison.
Some lenders will add in selected costs when they are calculating the APR. This can include appraisal fees, credit report fees, inspection fees and so on. There are several different fees that can come with a mortgage and not everyone is going to pay all of them so this can make APR’s misleading when the lender adds all of these fees in to calculate the rate.
APR’s can be Deceptive when you Compare Mortgage Rates
Some lenders will advertise very attractive APR rates but they will not disclose that these are only available to certain people. If you do not qualify then your APR will be higher. A good example of this is where the lender does not include the cost of mortgage insurance. Sometimes these low APR rates are only available to people with perfect credit scores.
What happens if you pay your Mortgage off early?
When you are looking at APR rates or interest rates you need to know what the impact will be if you decide to pay your mortgage off early. Usually the advertised rates for mortgages are for the total loan period e.g. 30 years. If you repay the mortgage in a shorter time do the same rates apply?
In a lot of cases where a person has paid up their mortgage early the actual APR paid ends up being higher than that advertised. This could be because the mortgage was loaded with high upfront fees and you are not able to spread these if you repay the mortgage early. So if you intend to repay early tell your lender so that you can properly compare mortgage rates.
Other Variables to Consider when you Compare Mortgage Rates
There are a number of different ways for you to reduce your mortgage rates. One of these is to make a larger down payment. Not all lenders will agree to this so you need to ask them first.
There are a number of different fees associated with mortgages and you can ask the different lenders to tell you how much these are and whether they add them into their APR calculation or not. There are other ways that you can reduce some of the fees such closing fees.
Talk to Different Lenders and ask the right Questions
You have learned throughout this article that in order to compare mortgage rates properly it has to be an apples and apples scenario. If one lender is adding fees to calculate their APR and another is not then this is not a fair comparison. Talk to the various lenders to find out what is included so that you can make a good comparison.