Refinance rates

A wide range of home mortgages is available to buyers. Even if you are a first time buyer, you can find a mortgage that suits your needs. However, to pick the right type of home mortgage for you, you need to know what your loan options are. This brief guide will explain the most common types on the market today.

The interest rate on an adjustable rate mortgage (ARM) lowers and rises in tandem with fluctuations in the state of the economy. Your home mortgage’s interest rate rises if the prime interest rate rises, and falls if the prime interest rate falls. This lets you get the maximum benefit from periods of low interest, but also means that if the prime interest rate rises sharply, your interest rate and monthly payments will rise with it. Because the risk of rising or falling prime interest rates rests on you, not on the bank, banks offer lower introductory interest rates on adjustable rate mortgage loans than on fixed rate mortgages.

The interest rate on a fixed rate home mortgage does not change over the term of the loan; it is set, or fixed. This cushions you from the shock of skyrocketing interest rates, but also prevents you from taking advantage of falling interest rates. Banks assume that at least once, the prime interest rate will spike above the interest rate of your fixed rate mortgage and the bank will have to pay the difference itself. Because banks must budget for this eventuality, they offer higher interest rates on fixed rate mortgage loans than on adjustable rate mortgages.

A convertible home mortgage loan begins as an adjustable rate loan, but you have a period of time during which you are allowed to convert to a fixed rate. This is a good choice of loan if interest rates are currently high, but you foresee a drop in rates. You can take advantage of the lower interest rate of an adjustable rate home mortgage when interest rates are high, then lock in a better interest rate for the life of the loan as soon as rates drop.

A balloon home mortgage begins with an introductory period during which you pay a fixed rate, but rather than paying the usual high interest rate for a fixed rate loan, you pay an interest rate almost as low as that for an adjustable rate mortgage loan. However, when the introductory period ends, you owe the total unpaid balance of the loan. Balloon loans are excellent for people who intend to renovate and resell a property before the introductory period ends, or who foresee being able to refinance at favorable rates within the next few years.