We all need money for different purposes and in many situations, including at the time of buying a home. We don't have the money when we actually need it. In such situations, we borrow it. When we borrow money, we have to pay interest to the lender.



Home buying can be a complicated matter if the involved parties are not fully aware of the interest rate concepts. Therefore, it is better to understand various types of interest rate before heading toward a home mortgage. Let us look at different interest rates:

a) Discounted rate: it is very simple; a moneylender is very gracious and he lets you pay fewer amounts for fixed period. Then after a specified period, he increases it usually based upon the Federal Funds rate; allocated by the government. Discount rate loans are quite popular among first time buyers and loans taken for renovation. This scheme actually gives time for the borrower to get used to the monthly payments etc.

b) Fixed rates: as name speaks, you have to pay fixed rate of interest for fixed period. During the time interest rate will not increase, but one should make sure that there are no obligations once fixed period is over. The loan period for the fixed rates loans varies from 1 year to 7 years.

c) Variable rates: if you need money immediately this is the option to go for. Variable interest varies over period of time at variable rate. Most lenders would be willing to give you money with variable interest rate but you need to pay more. The variable rates are higher than the fixed, discounted, and capped rates.

d) Capped rate: In caped rate, lender will have final cap over your amount i.e. your interest rate will not increase over a specified value called as cap value.

e) Tracker mortgages: in this system your interest rate depends on bank of England (BOE) base rate. If BOE base rate increases then interest increases, if BOE base rate decreases then interest rate decrease. But the standard rate mortgages change monthly or yearly where as, the tracker mortgage rates change with in two weeks following the change in BOE base rates. The main draw back is if the base interest rates rise sharply your tracker will also rise and you will be paying more.

f) Flexible mortgages: it is the friendliest mortgages in the arena. Here, the mortgage interest rate is flexible, and so interest can take a break or increase or decrease, for that matter. This reduces your interest payment with every payment you make to the lender.

g) The APR: APR stands for annual percentage error, so your payment depends on APR at which you took the loans, so it is always preferable to take loans at lower APR. You should make sure you have gone through all the lender's terms, some lender offer low APR for a fixed period and then increase the rates to standard rates.

h) Redemption penalties: most interest discussed here has different discounts, which vary periodically; they do come up with penalties known as redemption penalties.