If you’re stepping into the world of mortgages for the first time, the lingo used to describe all the different kinds of lending agreements available to you can be more than a little confusing. What are the benefits of a fixed rate versus those of a variable rate? What is a rate cap? And how can you determine which one of these is best for you? Here are the answers to all your basic mortgage questions in one short and simple guide.
Fixed rate. Fixed mortgage rates are most beneficial for homeowners who plan to stay in their homes for longer periods of time. Though fixed rate mortgages tend to have a slightly higher interest rate, the trade-off is knowing exactly how much interest you will pay on your home loan for the entire length of the term. If you struggle with budgeting your mortgage payment, this is a good option.
Adjustable rate. An adjustable rate mortgage (often called a “standard variable rate mortgage” outside of the United States) is one that is subject to fluctuations based on the standard interest rate for your lender. These kinds of mortgages can seem like a great deal at first because they often boast lower interest rates. However, those rates can change over time, meaning that you could end up paying more for your mortgage than you planned to.
Adjustable rate mortgages are good financial tools, however, if you sign on to them through a discounted rate and plan to upgrade to a newer home after a few years; this kind of arrangement allows you to take advantage of lower interest before the discounted rate term is up.
Another kind of adjustable rate that could serve your financial interests is a capped rate. This will ensure you that though the rate varies on your mortgage, it will never go above a certain amount. Borrowers with capped interest rates also sign a contract referred to as ‘cap and collar’, which more strictly dictates the activity of the variable rate by asserting that it won’t go below a certain amount, either. This kind of mortgage can be a financial advantage when interest rates are high but a hindrance if they should ever fall.
Going green. They’ve been around for several decades, but the trend of green mortgages is really beginning to take off in the U.S. This kind of mortgage may make you eligible for a lower interest rate, but the most significant perk is that it has the potential to save you money in the long run. With a “green” mortgage, formally called an energy efficiency mortgage or an energy improvement mortgage, your lender will increase the size of your loan to finance energy efficiency improvements to your home. While the loan amount is initially bigger, the lender calculates the savings that you’ll make on your monthly utility expenses as additional income, which means that you’ll have more money to pay off your home loan.
These are the basics, but there’s more knowledge to dig into!