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So you
want to find the ideal mortgage? The one with the lowest interest rate and keep your
monthly repayments as low as possible? And I guess also you want to avoid any
nasty surprises such as hidden fees or interest rate hikes down the
track?
Well
here's a few tips to set you on the right path to finding that
perfect low interest mortgage – and believe it or night - taking
the very lowest interest rate on offer may not be the best course of
action!
Learn
about the two main types of mortgages and understand the difference
between them
Before
you even start looking at different mortgage rates on offer you
should decide what type of mortgage you are looking for.
There
are two basic types:
- Fixed
Rate Mortgages
- Adjustable
Rate Mortgages
With a
Fixed Rate Mortgage the interest rate stays the same for the entire
period of the loan, excluding taxes, assessments
and insurance. Though at first glance the interest rate and repayments may seem a little higher than some of its competitors.
With
an Adjustable Rate Mortgage the interest rate may change based on
certain factors. When you take out an Adjustable Rate Mortgage you
will choose the amount of time you want the interest rate to be fixed
for. This in turn will influence what interest rate the bank is
prepared to offer you. If you take out an Adjustable Rate Mortgage
for one year then the interest rate will be frozen for one year only
and will change after this - quite possibly increasing!
Adjustable
Rate Mortgages often seem like the better option because the interest
rates will almost always be lower than a Fixed Rate Mortgage. The
downside is that you really don't have a lot of control over what
interest rate your lender will try to spring on you at the end of
your initial term. It's a bit like gambling really – If you take an
adjustable rate mortgage for a 1-2 or 3 year term and interest rates
have dropped hugely at the end of this period then you may just end
up with a better deal – however, what happens more often than not
is your interest rates will increase after your term is up and your
monthly outgoings will increase with it!
The Fixed Rate Mortgage will often appear to be a worse deal initially –
the interest rates will be marginally higher and the monthly mortgage
repayments will be accordingly greater – this can be offputting but
depending on the term you wish to keep the house (and the mortgage)
it may actually work out to be a cheaper option in the long run.
We'll look at this further shortly.
The
only time I would choose an Adjustable Rate over a Fixed Rate Mortgage is when I know I will only be occupying my house for a
limited period of time – for instance if you have bought your first
home, and, although you're proud to own it, you know inside that you will be
wanting to trade up in the next couple of years to something better –
and more importantly you are confident your income is going to grow
and support these plans.
In this case you will be re-financing or
taking out a new mortgage when you buy your next house and so a 1, 2
or 3 year Adjustable Rate Mortgage is the best option depending on your game plan. You'll get a better
interest rate and you'll refinance and pay off your old mortgage when you move to
your new home - and before the interest rate can change!
There
are a few variations of the Adjustable Rate Mortgage that we will nvestigate further in the next article – these can prove extremely expensive if they
are not operated correctly – If you are very strong willed and
motivated they can also end up saving you a lot of money, but sadly
this is not the case for most people.
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