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[I381]Interest Rates For Mortgages

by Nazir Hussain, Naz

That the interest rate; the discounted interest rate, reverts back to standard variable at the end of the two year period. For example, if 3.99% represents a discount of 2% from the standard mortgage package then the variable interest rate will be 5.99%. The variable rate at the end of the two year period may well be 6.7% depending on the interest rates at the time or if there is a downward trend in the property market, your interest rate two years on may well be below 3.99% at the rate of say 3.2%. Since market conditions are very difficult to predict in advance you; as a customer, may well find yourself at a disadvantage. The variable rate being either higher or lower than the 3.99% discounted initial rate has implications for your cashflow as well as living standard. Higher rate than 3.99% may cause you financial hardship and conversely a rate lower than 3.99% will increase your disposable income and thereby improve your living standard.

There are usually penalty clauses for an early exit. 3.99% being the discounted rate for you, if a situation arises that you have been offered a better deal elsewhere. Your option to exit from your current agreement with your existing lender are limited. Your existing lender will levy a fee if you were to get out of the agreement. In very limited cases, the new lender may cover that cost as well as other legal costs but he will also tie you into a similar contract.

Is the discounted mortgage a win-win option for both lender and customer?

The customer can:-

Plan his/her finances knowing that a fixed amount of money is going towards housing costs every month.

The discounted interest rate may well provide a better comparison to the renting option.

Discounted rates help customers expedite their purchasing decisions. In essence, it is an incentive to buy ones home.

Lender can:-

Compete for business by offering products and packages that are or appear to be more competitive than the competition.

Use discounted instruments to improve business during slow market conditions. A good example of slow market conditions would be post collapse of the housing boom of the late 80's in the UK and elsewhere in Europe.

Finally, discounted mortgages are a good entry point for people with lower income levels even. I say this because buying a property is very risky anyway but lower rates reduce that risk somewhat even if it is for a short period of time. Reduced mortgage costs to the consumer provide a very good incentive and a boost to the housing market as well as increasing the demand for housing. Research findings for the period 1986 to 1988 show that demand for housing increased by 13% as a direct result of the discounted mortgage rates. In conclusion, discounted rates are therefore good for the consumer and good for the lenders.

Your lender is trying to convince you that you need to apply for a refinancing mortgage so that you can transfer to a fixed interest mortgage rate. According to your lender, you have to take this action if you wish to be free from the capricious shifts of the market rates. But how is your mortgage affected by the economy?

Determinants of Interest Rates

As with everything in the market, your mortgage interest rates are determined by the interaction of supply and demand. When borrowing is up and the economy is strong, interest rates increase. When borrowing is down and the economy is soft, interest rates decrease.

But it's not only the market forces that are setting the stage. There is also the Federal Reserve. Whatever the Feds do and wherever they set the fed funds play a crucial role.

The Federal Funds Rate

Now what is a federal funds rate? Also called the fed funds rate, this is the interest rate that is charged whenever banks lend funds to other banks. The rate's maturity lasts for only two years or less, which makes it the short-term type. The behavior of the federal funds rate affects short-term interest mortgage rates.

As simple economic laws would have it, when short-term rates decrease, borrowing and spending are likely to increase. The result is inflation and the Federal Reserve tries to avoid this.

As for long-term interest rates, these are rates that last for ten years or more in terms of maturity. Short-term rates influence them indirectly. They typically rise when attempts to assuage inflation come into play. When inflation is increasing to undesirable heights, the Fed tries to remedy the situation by increasing short-term mortgage interest rates. People whose finances are gravely affected by market movements of interest rates are forced to consider alternatives.

Heed Your Lender's Advice and Grab that Refinancing Mortgage

Your lender may be right after all. Maybe you do need that refinancing mortgage. All these talks about mortgage rates are Greek to you and the last thing you need is to have to watch over them if only to keep up with your refinancing mortgage payments. Maybe that adjustable mortgage rate you're in right now is just not cut for you.

The Difference Between an Adjustable Interest Mortgage Rate and a Fixed Interest Mortgage Rate

By the way, do you already know what an adjustable interest rate is? How does it differ from a fixed interest mortgage rate? An adjustable rate is the type of interest rate that is subject to the changes in the market. This means that you may suddenly find yourself dealing with an unexpectedly high interest rate because of changes in the economy.

A fixed interest rate, on the other hand, is the type that is unchanged by the market trend. It remains the same no matter what shifts occur in the economy. It is more stable and more predictable.

Go on ahead and heed your lender's advice. Grab that refinancing mortgage while the offer's still up.

Article Source : When Should You Refinance Your Mortgage

About Author

Both Nazir Hussain & Rony Walker are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.

Nazir Hussain has sinced written about articles on various topics from Debts Loans, Investments and Debts Loans. Discounted mortgages improve your cashflow. They help to release money which can used for other activites.For more information visit and. Nazir Hussain's top article generates over 550000 views. to your Favourites.

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