Mortgage Rates: Fixed Rates vs. Variable Rates
Mortgage rates are always changing, so it is important that you understand factors that can make them change day to day, especially if you sign up for a variable rate mortgage. Below I will discuss the differences between fixed and variable rate mortgages, as well as factors that can cause changes in both.
A fixed rate mortgage is just like is sounds, fixed. The interest rate will remain the same throughout the term specified in the mortgage. While you might see other rates lower than yours, they might be variable rates, also called adjustable rates.
What are adjustable rates? Really…okay, these are not as clear-cut as fixed rates. Variable rates can change at different intervals, depending on what your mortgage broker suggested. These rates vary based on many different factors. Some of these factors are, 1-year constant-maturity Treasury (CMT) securities, the Cost of Funds Index (COFI), and the London Interbank Offered Rate (LIBOR). Yes, depending on your bank, your monthly payment could vary based on global economic indexes. Be very wary, adjustable/variable rate mortgages are very tied to economic trends. So, watch the economy and know what’s going on in the world…and weigh the costs.
Are there any tricks to lowering my initial rate, be it fixed or variable? Well, there are several factors that will affect your mortgage rate. Those factors are:
Assets: Anything that the bank can take possession of and resell. Stocks, bonds, mutual funds owned, other property including (although I disagree) cars, boats, other properties.
Gross Income: They use this number with the next to determine your Debt-to-Income Ratio, but they also calculate your housing costs based on this:
Gross Income: $65,000 per annum
Est. Housing Costs: $26,000 per annum (40% of Gross Income)
That’s how they see it.
Liabilities: Certain items such as taxes, loans, monthly expenses, etc. Liabilities can best be described as items that take money from you.
Gross Liabilities: $24,000 per annum
Debt-to-Income: This number is calculated by taking the total debts owed divided by total income. If you total liabilities include; 2 car loans, student loans (first-time homeowner) and total: $130,000 and your total income per year is $65,000, then your debt-to-income is: 2
Debt 130,000
Inc. 65,000 = 2…2 to 1 is your debt to income, it is best to keep it here or lower.
Current Prime Rate: The Rate at which banks lend their money to their most credit-worthy borrowers.
If there are things that you can directly control to improve any of these areas (except current prime rate…unless you’re Chairman of the Federal Reserve Ben Bernake) then work on doing those, increase your assets, decrease your liabilities, and if you can, increase your income. I’ll give you some more advice on determining your assets, liabilities, and cash flow later. So stick with me!
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- Tags: debt to income, fixed rates, home mortgage refinance rates, prime rate, variable rates
