Interest Rates
Interest is the amount
of money a finance institute charges you for loaning you the money.
Interest is front-loaded on a mortgage, which means that for the
first couple of years you are mainly paying interest. Look on the
bright side: the interest money you pay is tax
deductible.
Why do rates go up and
down?
The answer to this question is
very complex. Basically, the rates go up when money is tight and
there are too many people trying to borrow money. Therefore, the
lenders can be picky about who they lend to. When money is not tight
or there are not too many people trying to borrow money, the rates
come down. The economic climate is a good indicator on whether the
rates are high or low. If the economy is not doing well, people
generally will not be looking to purchase homes and the rates come
down. On the other hand, when the economic outlook looks bright,
people will generally want to spend more and buy homes. Thus, the
rates go up. Listening to the advice of the chairman of the Federal
Reserve board can be helpful in determining whether the rates will
go up or down or remain the same. The rates may increase or decrease
throughout the course of one day. This can occur though it's not
common. There are many places to check the current rates: the local
and national papers, at the lending institutions and on the Internet
at sites such as www.RateEmpire.com
When you apply
for a loan, the lender may ask you if you wish to lock in the loan
with the current interest rate or to float the rate. What does it
mean?
A lender will generally ask you
if you wish to lock in the interest rate for up to sixty days. This
means that if you close on your home within sixty days, the interest
rate on the day you locked it in is the interest rate applied to the
loan. If however you do not close within sixty days, the current
interest rate will be applied to the loan. This may be higher or
lower than when you originally applied for the loan. Remember the
longer the lock in period the higher the interest will be, because
the lender needs to protect himself in the event rates
skyrocket.
You may also tell the lender that you wish to
float the rate until closing which gives you the option of locking
in at any time within the sixty days. If you believe interest rates
will go down this may be a good option. However, the rates may go up
so it can be somewhat of a gamble.
A word of caution --
always get the lender to put everything you agree to in writing.
This includes whether you are locking in or floating a
rate.
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