What is Interest Rate?
The lender charges you a certain amount of money for granting you the home
loan. That certain amount of money is the interest rate.
For example, if you get a home loan for $250,000 then you will be charged
an amount of money which can be the same or more, but you pay it back monthly for many years to
come.
What is Annual Percentage Rate (APR)
The annual percentage rate illustrates the total annual cost of a mortgage
which includes interest, fees, lender points during its complete term, and closing costs in terms
of the yearly rate.
It is very important to understand what the Annual Percentage Rate is
since it tells you the collective charge of the home loan.
Down Payment in Buying a Home
The lender usually asks for a down payment which equals 20 % of the agreed
on selling price of the purchased home. But not everyone can pay 20% up front of his or her
own money.
Therefore, mortgage insurance is required to protect the lender in a
scenario where the borrower can’t repay a loan. Or like other home buyers with less than a 20
% down payment, some borrowers apply for up to two loans.
Here is an example: If you only put 7% towards a
down payment, then you can apply for the first mortgage which will be at the rate of 13 % (7% + 13%
= 20%) and the second mortgage will be the remainder which is an 80% mortgage loan. That way
you don’t need private mortgage insurance.
Down payment can make your lifestyle easier or harder depending on the amount
of money which affects the following parameters:
-Home loan amount,
-Amount of monthly payments,
-Cash availability for other home buying costs
Which One to Choose: Adjustable Rate vs. Fixed
Rate
Advantage of Fixed Rate:
-The interest rate continues with no change for the entire life of the
mortgage.
Therefore,
- That way there won’t be any surprises in the short and long run by
knowing exactly the amount of your monthly payments.
Disadvantage of Fixed Rate
-If there is a drop in the market interest rates, sadly you will not
benefit from that effect since you have a fixed rate for the life of the mortgage.
Advantage of Adjustable
Rate
-The specified initial period of the adjustable mortgage rate is typically
lower than the interest rate within a Fixed Rate Mortgage.
-The interest rate may drop even lower* or maintain the same rate when it
is adjusted after the initial period that is agreed upon.
Disadvantage of Adjustable Rate:
-If the index increases, your interest rate and monthly payment will
increase*.
-If the initial rate you began with is less than the fully-indexed rate
(FTR), then the interest rate and monthly payment may increase considerably at the first adjustment
– even if the Index does not change.
What is more impacting is that if the Index rises, then the interest rate
and monthly payment will increase even more.
*There are limits on how far the rate can increase, or how low the rate
can decrease at every single adjustment and over the mortgage loan life.
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