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Interest Rates

Interest Rates Explained: Fixed vs. Adjustable

When you buy a home using a home loan product, you’ll need to work with a bank or lender to finance your purchase. In order to loan you the money, your bank or lender will charge you a percentage of the principal (the amount loaned), which is called an interest rate. Interest rates are calculated as a percentage of the total amount borrowed and are determined during the home buying process. After you purchase a home, your monthly mortgage payment will include your interest payment until these fees are paid in full to your lender.

While interest rates are applied to almost any type of loan or line of credit (credit cards, student loans, etc.) mortgage payments typically have two types of rates: fixed rates or adjustable rates. Here’s what you need to know about the differences of these rates so you can choose which is the best for you.

What are fixed rates?

Fixed interest rates are interest rates that remain unchanged throughout the entire life of the loan. These rates are simple and easy to track over the life of the loan and make it a breeze for budgeting because the amounts paid each month are set for the life of the loan. Fixed rates help to stabilize rates to avoid sudden (and potentially significant) increases if interest rates rise.

What are adjustable rates?

Adjustable interest rates (also known as adjustable-rate mortgages or ARM’s) are interest rates that are subject to change throughout the life of the loan. They often begin lower than fixed rates and are set below the market rate at the time but then change over time to match the market. With these rates there is a period where the loan has a fixed rate, but that period can vary significantly and after that point the rate is subject to change. Due to the changing over time, ARM’s can be much more complicated and difficult to track than fixed rates.

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Factors that determine your rate

A common myth about interest rates is that everyone receives the same rate. The truth is that everyone receives a rate specific to them based on a few key factors. These include:

  • Your credit score: having a great credit score and good financial situation can give you a better chance of getting a lower interest rate.
  • Length of the loan: most loan lengths are 30 years, but if you are interested in / able to get a lower loan, this will help you get a lower rate. 
  • Type of loan: depending on the type of loan you get; your rate will fluctuate. This is where types of loan like refinance, jumbo, VA Loan, FHA Loan, and other types come into play.
  • Current market conditions: the market fluctuates often based on supply and demand across the country.

Choosing between fixed and adjustable rates

When determining which of these rates is best for you, you’ll want to consider all aspects of each rate in addition to your personal situation. Think about how much you can afford to pay today for your mortgage, if you would be able to afford your mortgage if it were to rise, and how long you intend on living in the home as you make your decision.

While ARM’s can prove to be cost effective in certain situations, we highly recommend you talk with a licensed loan officer to decide if this is the right product for you. A majority of veterans choose fixed rates over adjustable rates due to the fact they will know what their monthly cost is for the entire term of the mortgage.

Get the best interest rates with a VA Home Loan

If you have served or are currently serving in the US military, you may be eligible to take advantage of the VA Home Loan, which is known for having some of the lowest interest rates on the market. Because the loan is insured by the government, VA-approved lenders are often able to charge much lower than rates you would receive with a conventional mortgage.

It’s important to note that while VA loan rates are generally lower than other loans, they often differ between purchase loans and refinance loans. Approved lenders can help you navigate the rates while you are buying a home or refinancing an existing loan. Our team at MHS Lending specialize in working with military families and veterans and will help you navigate the home buying or refinance process every step of the way. If you’re ready to start your home buying journey today and want to learn more about the VA Loan, Click Here to get started!