Mortgage Rates - Fixed Mortgage Rates - Adjustable Mortgage Rates

Interest Mortgage Rate

The interest rate a borrower pays for the mortgage is negotiated between the borrower and the lender. Interest rates fluctuate daily, depending on conditions in the mortgage market. It is always a good idea to check with several mortgage lenders to make sure you are getting the best interest rate available.

Annual Percentage Mortgage Rate

Adjustable Rate Mortgage

An Adjustable Rate Mortgage differs from a fixed rate mortgage because the interest rate and monthly payments may increase or decrease during the life of the loan.

The initial interest rate on your mortgage will remain in effect from 12 to 18 months. Your mortgage documents will indicate the date when the first change in your interest rate will occur. Thereafter, your monthly payments will increase if the one-year Treasury Constant Maturities index goes up and will decrease if this Index falls.

Your interest rate cannot increase or decrease more than one percent in any one year. Over the life of the loan, the interest rate may not increase or decrease more than five percent from the initial interest rate.

Your lender must explain how the Adjustable Rate Mortgage is calculated when you apply for your loan. Your lender must inform you at least 25 days in advance if there is an adjustment to your monthly payment.

With a fixed-rate mortgage, the interest rate stays the same during the life of the loan. But with an ARM, the interest rate changes periodically, usually in relation to an index, and payments may go up or down accordingly.

Lenders generally charge lower initial interest rates for ARMs than for fixed-rate mortgages. This makes the ARM easier on your pocketbook at first than a fixed-rate mortgage for the same amount. It also means that you might qualify for a larger loan because lenders sometimes make the decision about whether to extend a loan on the basis of your current income and the first year’s payments. Moreover, your ARM could be less expensive over a long period than a fixed-rate mortgage—for example, if interest rates remain steady or move lower.

Against these advantages, you have to weigh the risk that an increase in interest rates would lead to higher monthly payments in the future. It’s a trade-off—you get a lower rate with an ARM in exchange for assuming more risk.

Here are some questions you need to consider:

Is my income likely to rise enough to cover higher mortgage payments if interest rates go up?
Will I be taking on other sizable debts, such as a loan for a car or school tuition, in the near future?
How long do I plan to own this home? (If you plan to sell soon, rising interest rates may not pose the problem they do if you plan to own the house for a long time.)
Can my payments increase even if interest rates generally do not increase?

Terms Defined

Adjustable-Rate Mortgage (ARM) - A mortgage for which the interest rate is not fixed, but changes during the life of the loan in line with movements in an index rate. You may also see ARMs referred to as AMLs (adjustable-mortgage loans) or VRMs (variable-rate mortgages).

Annual Percentage Rate (APR) - A measure of the cost of credit, expressed as a yearly rate. It includes interest as well as other charges. Because all lenders follow the same rules when calculating the APR, it provides consumers with a good basis for comparing the cost of loans, including mortgages.

A Brief History of Mortgage Rates

Mortgage rates are heavily influenced by the secondary market where large mortgage investors, such as Fannie Mae or Freddie Mac, buy mortgage loans from brokers and lenders. Investors either hold the mortgages in their portfolio or combine the loans into mortgage backed securities.

The best mortgage rates typically happen when the economy slows, because investors speculate that the Federal Reserve will cut interest rates in the future to help the economy improve. During this period of higher demand, lenders can offer lower mortgage rates to consumers.

When economic news suggests that the economy is improving, investors speculate that the Federal Reserve will raise interest rates in the future to control economic growth and inflation. Lenders have to charge higher mortgage rates in order to sell their mortgages to investors.

Mortgage rates move in cycles according to the health of the economy. Reports that can provide an indication on which way rates may be headed:

Consumer Price Index - One of the most important indicators of inflation. Higher inflation means higher rates, less inflation means lower mortgage rates.
Employment Cost Index - This index measures the rate of change in wages, salaries and benefits. It is important because rising labor costs can force businesses to raise prices to compensate.
Gross Domestic Product - Measures the nation's total economic output for a given 3-month period. When growth is too strong, it can cause demand for goods and services to exceed the supply, allows businesses to charge more.