If only the home purchase process were as simple as making an offer, signing a document and making agreed upon payments on time. For those purchasing homes in South Carolina and throughout the country this year, these are merely the basic components of buying a home. There’s a lot more to it. Even if you’ve bought a home in the past, and especially if you’re entering the market for the first time, several key issues will have a significant impact on your purchase. One of the most complex areas in a closing is interest rates.
There are two primary types of home mortgage interest: fixed and variable rates. The interest on a home mortgage loan is calculated as a percentage of the loan. It is imperative to make sure you understand the difference between fixed and variable interest rates before signing an agreement.
Fixed interest rates do not always last the entire length of a mortgage loan
The main difference between fixed and variable interest rates is that the latter fluctuates, while the former remains constant, at least for a time. This is important for home buyers to understand. A fixed interest rate means that your interest payment will be the same from month to month; however, the agreement might stipulate that this amount is to remain fixed for a certain length of time or for the life of the loan.
Variable interest rates change periodically. The rate is based on a benchmark (think “standard”) in accordance with the current lowest interest rate that U.S. banks charge their best customers. In real estate, a variable interest rate is also commonly referred to as a “floating interest rate” or “adjustable-rate mortgage,” (ARM).
Why mortgagors prefer fixed rates
If you’re taking a 30-year mortgage on a new home, you will no doubt prefer a fixed interest rate, especially if current rates are low. Many home buyers say they like the predictability provided by a fixed rate of interest. In other words, if benchmark rates increase, your payment will not be affected. It will stay the same.
Keep in mind, however, that if prime interest rates drop lower than your fixed rate during the life of your mortgage loan, your payment will remain the same. It will not drop. This is why some people opt for variable interest rates. If you’re investing in a short-term loan or plan to relocate again in a few years, you might be able to save money with an ARM. In any case, make sure to ask your South Carolina agent and loan officer lots of questions to fully understand your options and make an informed decision when buying a home.