How Fixed Home Loan Rates Are Determined
Part of a home loans’ price is the interest rate and it’s the extra amount that you pay to the lender each month on top of the amount that you pay for the property.
If you know what a home loan’s rate is and how it’s determined, then you could have an easier job of finding out what you will need to pay – and it can also help you to find a better mortgage, too.
What is a home loan’s interest rate?
Interest is the extra money that you pay on a loan and the interest rate is determined by a number of factors. The amount is set by the market fixed home loan rates, so if these drop, the interest rate will also drop. However, if the market fixed home loan rates rise, then so will the interest applied to the loan. Interest will be calculated against the value of the initial loan, so there will be an idea of the extra amount added before you sign on the dotted line.
Why is it based on the market’s fixed home loan rates?
The reason why a home loan’s interest rate is determined on the market’s rate is because that’s where home loans are both bought and sold. Without the market fixed home loan rates, a lender would probably be less likely to lend you any money – because their money would be tied up as you repay over the course of the loan’s term.
When you get a home loan, the lender gets their money back straight away from an investor (and with a profit, too), and the reason why investors pay them the money is because they want to have payments coming for a long period of time. These payments are your monthly payments.
And it’s the same investors who determine your interest rate, too.
What are the kinds of interest fixed home loan rates?
There are two kinds of home loan interest fixed home loan rates – and they are fixed and variable.
With a fixed rate you will know how much money you pay each month until the loans term is over – and it won’t change throughout this period of time. With a variable rate however, the amount of interest that you pay can increase or decrease when the market fixed home loan rates rise or drop. So, if the market fixed home loan rates drops, you’ll pay less money. But, if it rises, you’ll need to pay more.
Both of these types of fixed home loan rates have their own benefits, but often fixed fixed home loan rates are the more preferred option. This is because the amount that you need to pay won’t change at all, so you won’t need to worry about the price increasing above what you can afford.