November 28, 2022
interest rates and adjustable rate mortgages
What You Need to Know About Interest Rates and Adjustable Rate Mortgages
By LLCR Staff

If you’re in the market for a new home, it’s essential to be well-informed before making such a significant choice.

Interest rates and adjustable-rate mortgages are topics worth considering beforehand. Regardless of your existing knowledge on these topics, we’re here to help provide or reiterate the basics.

Interest Rates

Interest rates, also known as mortgage rates, come into play when taking out a loan to pay for your home. Simply put, this is the fee charged by your lender for loaning you money. 

As homeowners work to pay off their loans, they pay the principal (payments on the amount of money borrowed) and interest. These two are lumped together as one monthly payment.

When it comes to the interest rates and the relationship to home prices, keep in mind the two tend to have an inverse relationship. As interest rates rise, it becomes harder for prospective homeowners to afford property, so the price tags on homes tend to drop. The opposite is true as interest rates decline.

Higher mortgage rates make it more difficult to afford a home now. However, the reduced demand also means less competition, providing buyers an opportunity to get a home for less than the list price, making sellers more likely to compensate for those high rates. They may do this by contributing toward closing costs or paying mortgage points.

Adjustable Rate Mortgages

On the topic of interest rates and home purchases, it’s helpful to understand adjustable-rate mortgages or ARMs for short.  Unlike fixed interest rate mortgages, which stay the same over time, this is a home loan with an interest rate that can change periodically. The initial interest rate may involve lower monthly payments than fixed interest rates, but over time your adjusted rate will be based on your individual loan terms and the current market.

So, when should a homeowner consider this type of mortgage?

Those who anticipate moving or selling their home within five years or before the adjustment period of the loan may find this type of loan more attractive due to the lower monthly fees. Folks who stay past this point take a gamble, not knowing what interest rate they may incur. Therefore, a fixed interred rate mortgage may be a wiser move if you’re looking for a long-term investment.

If you have home-buying questions beyond interest rates and adjustable-rate mortgages, connect with one of our experienced team members. Our licensed brokers are eager to help answer questions and help you secure your dream home! Connect with us today to get started.

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