When a person takes out a home loan, the lender will, in nearly all cases, charge him interest on the loan. This interest is assessed on the full amount of the loan and is applied in two forms: fixed-rate and variable-rate. Under a fixed-rate loan, the borrower pays a consistent amount of interest for the whole life of the loan; under a variable-rate loan, the amount of interest paid shifts. It is critical for buyers to monitor these interests rates when taking out a mortgage.
Shopping For A Loan
When a person is shopping for a home loan, he will generally submit an application to a number of different lenders. This is because each lender will charge him a different set of rates and fees, depending on the company's policies. Before shopping for a loan, the prospective homeowner should have some idea of the current interest rate and whether this rate is relatively high or low. If it is high, he may wish to shop for another rate before taking out a loan.
Servicing A Home Loan
When a borrower is repaying a variable-rate loan, the percentage of interest will shift in line with one or more indexes of mortgage rates. To prepare for these shifts, the borrower should identify what indexes his mortgage is pegged to and get some sense of the range and volatility of these indexes. This will allow him to better prepare financially for the payments he will have to make on the loan and reduce his chances of defaulting.
Refinancing
Sometimes, after taking out a home loan, a borrower will seek to replace his current loan with a new one. This process, called refinancing, allows the borrower to take on a new loan with more favorable terms. A borrower is best off refinancing his current loan after the market for mortgage rates has become more favorable. He should monitor the current rates and, if he sees rates drop significantly, begin to consider refinancing.
Considerations
Mortgage rates are most important to people who currently have a mortgage or who are considering taking one on. However, these rates can also be of interest to other parties, particularly investors. A shift in mortgage rates can have widespread effects on the economy. For example, an uptick in mortgage rates was a factor in the bursting of the housing bubble of the 2000s, setting off the largest recession in decades.
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