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Which Loan Is Right For You?: Fixed Vs. Variable Mortgage Rates

04/12/2010

A home is the biggest purchase most people will ever make. However, few can afford to purchase property using cash. First time home buyers usually need to borrow money and most get that money from mortgage lenders.
What follows is an overview of the two most common mortgage types and tips for getting the lowest mortgage rate from a mortgage lender.

Fixed rate

With a fixed rate mortgage, the interest rate remains the same throughout the term of your mortgage. If the interest rate is six percent the day your mortgage is approved, it will still be six percent on the day you make your last payment. Since there's never any change in the interest rate, your monthly mortgage payment never changes either.

Borrowers need never worry about interest rate fluctuations and for many, that's a relief. The stability that comes with a fixed rate mortgage makes monthly budgeting easier because you always know how much your home will cost.

Variable Rate

With a variable rate mortgage, the amount of interest you pay changes from time to time. The interest rate can move up or down depending on the actions of the central or federal bank. When interest rates are down, variable rates are also down, which make your mortgage more affordable. But when they're up, your mortgage costs more.

Before deciding on a variable rate mortgage, be sure you'll be able to afford the monthly payments not only when interest rates are low, but also when they increase. This could be difficult if you're on a tight budget.
Excellent Credit is Key

A history of responsibly managing credit is the key to securing the best mortgage rates lenders have to offer. Lenders pay very close attention to your credit history when making their decisions. When they see a solid track record of on-time payments, they're more confident you'll honor your mortgage obligations. Since you're perceived as less of a credit risk, you'll usually be offered more favorable rates as a way to get your business.
A flawed credit history raises a red flag to lenders. They perceive individuals with bad credit histories as higher risks. To help offset those higher risks, most lenders charge higher interest rates.

As you compare fixed mortgages vs variable mortgages, you'll notice that different lenders offer a variety of loan rates. Generally, lenders offer their preferred rates to borrowers with the best credit history. Remember, the better your credit history, the better position you're in to negotiate down those rates. So always manage credit responsibly.

Before settling on a lender, shop around and see who's offering the best rates. It's worth the time and effort since even small reductions in the interest rate can translate into huge savings over the life of your mortgage!

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