There are many lenders in Bay Area, CA, and the mortgage rates they charge differ from one lender to the next. In a bid to get the most affordable interest rates to buy a home, prospective home buyers often spend a lot of time comparing Bay Area mortgage rates. Understanding the components of the mortgage rate is the key to finding the most affordable home loan.
Mortgage Rate Defined
This is the interest rate charged on a mortgage in Bay area . The interest is added to the principal to determine the monthly payments. There are basically two types of interest rates charged on mortgages; adjustable and fixed interest rates.
i) Fixed Rate Mortgages (FRM)
An important point to note about FRMs is that the interest rate quoted by the lender when the mortgage is approved is applicable throughout the life of the mortgage. The rate is not adjusted over time to take into consideration the prevailing rate of inflation, market conditions or the lenders revised profit margin policy. The best time to get an FRM is when the economy is performing exceptionally well and interest rates are at an all-time low. By locking the rate, you can be assured of making the same monthly payments even during an economic recession. The downside is that lenders may quote a higher fixed rate to minimize their losses if the index rate increases above the mortgage rate they quoted. To calculate the fixed rate, the lender adds the prevailing index rate to their preferred profit margin. For instance, if the lender requires a profit margin of 2.3% and the index rate currently stands at 3.9%, the lender will quote a mortgage rate above 6.2%.
ii) Adjustable Rate Mortgages (ARM)
Unlike the FRMs, adjustable rate mortgages have fluctuating interest rates throughout the life of the mortgage. The term of the mortgage is usually divided into two; fixed rate period and the adjustable rate period. For instance, a mortgage may come with a fixed rate period of five or ten years followed by a period of fluctuating interest rate. Consider a 5/1 30-year mortgage. What this means is that the mortgage comes with a 5-year fixed rate period, where the initial rate is applied. After the fixed rate period lapses, the rate is adjusted once a year. When buying a home, you want a mortgage with a long fixed rate period especially if the current index rate is low.
Rates are usually adjusted in ARMs to take into coordination the prevailing rate of inflation. Once the government collects data on changes in consumer prices, the base/index/market rate is adjusted to tame the runaway inflation. To come up with the new interest rate, lenders simply add their fixed profit margin to the new index rate. In some cases, lenders may adjust interest rates to accommodate a revision of their profit margin policy. This may lead to an increase or reduction of the mortgage interest rate.
Getting the Best Mortgage
It is possible to get a great mortgage deal regardless of the prevailing economic conditions. Consider the following tips:
– If the current interest rates are low, find a mortgage lender that quotes the lowest rate and get a fixed rate mortgage. If you think that rates may still go down in the future, make sure the policy allows for affordable refinancing.
– If current rates are high, but you expect them to go down in the next couple of years, you can apply for an adjustable rate mortgage with an initial fixed rate period of less than five years, depending on how long you think it will take for rates to start going down. This can save you a significant amount of money once the lender starts revising the rate downwards.
