Is it Really Possible to Refinance a Variable Rate Mortgage Loan?
A variable rate mortgage, tracker mortgage, or flexible mortgage loan is a residential mortgage loan where the interest rate on the loan is adjusted automatically depending on an economic index that reflects the current cost to the bank of lending on similar credit markets. Normally, the loan can be provided at the current market interest rates. However, if the current market interest rates go up, the variable rate mortgage loan rate will also go up. You do not pay interest to go down; you pay interest to go up. The benefit is that if you know exactly when to purchase your home, you can get the lowest possible variable rate mortgage loan rate.
There are two basic types of variable rate mortgage loans: the fixed rate and the hybrid mortgage. A fixed rate mortgage is one in which the mortgage rate remains constant during the life of the loan. This type of mortgage is beneficial if the mortgage is purchased at the same time as a home. With a fixed rate mortgage, there is no way for a borrower to lose money due to interest rates going up or down. With a hybrid mortgage or a variable rate mortgage, however, the future interest rates are unpredictable.
If borrowers do not purchase a fixed rate mortgage at the same time as their home, they will experience a situation in which they will pay more interest for the mortgage than a lender would charge for a variable rate mortgage loan. To prevent this problem, borrowers should purchase a variable rate mortgage loan from a variety of lenders, which have varying interest rates. This way, borrowers can choose the most competitive variable rate mortgage with the lowest overall cost. Borrowers can get a variable rate mortgage with a variable rate loan and a fixed rate loan at the same time.
Some borrowers choose to take advantage of a situation where the prime rate throughout the United States is falling. In this instance, when the prime rate exceeds the variable rate mortgage rate, the borrower pays the difference. Because some lenders do not advertise this particular feature, potential borrowers should search online to find out if any lenders have this type of loan. By knowing that the prime rate is always higher than the variable interest rate, borrowers can calculate how much money they will save if they pay the difference between the two interest rates throughout the life of the loan. Before signing on the dotted line, borrowers should calculate the total amount of interest that will be paid on a monthly basis to spread the payments over the life of the loan.
If the variable rate mortgage loan has a longer term, then the monthly payment will be more than the amount of money that could be saved if the interest rates were lower. As such, borrowers should only purchase variable rate interest only mortgages if they will be able to pay the lower monthly payments. This ensures that the loans will always be affordable.
Another factor to consider is whether the interest rates will change at all. The Federal Reserve Bank lowers short-term interest rates in order to raise long-term interest rates. In addition, other factors such as inflation may cause real estate values to appreciate even when the variables are low. To determine the likelihood of changing variable rates, homeowners should also look at the time frame and see if the prices of commodities, such as oil or gas, or basic goods like food tend to increase over time. Based on this information, homeowners can adjust their budget accordingly.