The best way to get lower mortgage rates is to shorten the term of your loan. Mortgage rates for fifteen-year plans are almost one percent lower than the mortgage rates for thirty year plans. Besides, you'll be paying interest for half the time, which leads to drastic savings on interest. Depending on your finances, though, shortening the term may not be possible.
Another way to get lower mortgage rates is to pay more up front. This also depends on your personal finances. If you plan to be living in your home for very long, though, paying points, or a larger down payment, will probably reduce your interest rate enough to save you more money than you spent to lower it. Use a mortgage rates calculator to determine what combination of rates and points will work best for you. Be suspicious of the ads that say “No points or closing costs required.” Usually what this means is that they are making back this money and more by giving their customers extremely high mortgage rates.
There are two kinds of mortgage rates offered: fixed and variable/adjustable. Fixed mortgage rates are fairly straightforward. You make the same monthly payments at the same interest rate until your loan is paid off.
Adjustable mortgage rates vary, typically according to the current market rates, but sometimes will be automatically raised after a set time by the lender. Many people will not consider adjustable mortgage rates as an option because of the uncertainty involved. It is wise to be wary of adjustable mortgage rates since they may rise later, but there are some situations in which adjustable mortgage rates are the best option. For example, if you are not going to be living in your home very long, you may want to take advantage of the initially low adjustable rates, since you'll be moving before they could rise very much.
Adjustable mortgage rates are lower than fixed, at least initially. They usually start out 2-3 percent lower than their fixed counterparts. Some adjustable rates even have a fixed period (five years is the most common fixed term for adjustable mortgage rates) during which you are guaranteed a low, fixed rate. If you plan on relocating in four, or even in six years, the possibility of the rate adjusting after five years shouldn't bother you.
When comparing adjustable mortgage rates, you should also realize that adjustable rates differ in more than just the percentage offered to you. One other important way in which they differ is their index. The longer the index, the less the rate will fluctuate with the market.
Those planning on staying in their home very long, however, should go with the fixed rate. Although the adjustable rates are lower initially, over the course of a 30 year loan, you want the security of knowing that your rate does not have the potential of rising drastically during that time. If you are on an adjustable rate which has been raised, you may want to consider refinancing to a fixed rate while mortgage rates are still low.
By Riannon Cutler