Mortgage Basics
A mortgage is either an adjustable rate mortgage or a fixed rate mortgage. In theory, an adjustable rate loan is usually one where the interest rate can change sometimes during the life of the loan.
In theory, a fixed rate mortgage is one where the interest rate remains the same over time.
In reality people can mix up these terms to describe loans.
Fixed Rate Mortgages
A loan that is a 25/30 year mortgage is a loan where the interest rate remains the same for the entire 25/30 year term of the loan.
The interest rate on this type of mortgage is usually the highest interest rate. This is why borrowers often choose other types of mortgage with lower interest rates.
Another loan that is 'fixed' is a 5 year fixed mortgage. This is a loan with a term of 30 years where the interest rate is fixed only for the first 5 years. After this period is over the interest rate on the loan becomes adjustable.
A mortgage loan could be fixed for many different time frames, including 6 months, 1 year, 2 years, 3 years, 5 years, 7 years, 10 years, 15 years, or more.
In each of these instances the interest rate will adjust when the fixed rate period is over.
Adjustable Rate Mortgages
Adjustable rate mortgages generally carry lower interest rates.
A borrower who is only planning on living in a house for a year may decide to get a loan that is only fixed for 2 years. That is all the interest rate protection the borrower needs. Of course, if the borrower ends up staying longer than 2 years the interest rate might become adjustable and the borrower may either have to live with it or refinance into a different loan.
Adjustable rate mortgages usually have a lifetime cap. The interest rate can't rise above this amount.
The Council of Mortgage lenders recently reported that an amazing 71% of all mortages and remortgages in April/May 2006 were arranged on fixed rate terms, that's 17% higher than the same period last year. The increasing attraction of fixed rate deals is a product of the attractive offers being made by lenders together with a desire by consumers to lock-in to the current low rates for as long as possible.
The balance shifted slightly towards new mortgages and away from remortgages, possibly a symptom of lenders making the benefits of remortgaging less attractive to existing borrowers – the recent increases in exit fees almost certainly a factor here. (That increase is currently under regulatory investigation by the way) Until recently, if you wanted to remain on a cheap mortgage you would have been advised to remortgage every two years, but the advice is to check more thoroughly now due to switching fees. First-time buyer mortgages grew in size slightly to an average of £106,400, that's almost £12,000 higher than April last year. First buyers are now borrowing an average of 3.2 times their earnings, which is also slightly up on last month. The average mortgage payer now spends 16.2% of their income repaying their mortgage, slightly less than previously and probably caused, the Council says, by the increased take up of fixed rate deals.
There has also been a crop of new fixed rate mortgage deals where lenders are offering to fix rates for as long as 15 years. That sounds crazy until you work out that it indicates supreme confidence in the stability of the money markets lokking forward.
Fixed rate mortgages are becoming more popular, with a fixed rate mortgage you need not concern yourself with rising interest rates. We have helped many arrange a fixed rate mortgage, so if you are looking for a fixed rate mortgage then why not give us a call on 0845 2 605 506;
