The Interest Rate Of A Mortgage: How It Is Decided And Why

Choosing our new home is by no means the last important decision we must make before getting the keys. Under normal conditions, we will have to resort to a bank to help us pay for it; so it will be necessary for us to go to your nearest office to request a mortgage and, if they agree to give it to us, decide between the options presented to us.

Moreover, another key moment in the purchase process is the choice of the interest rate for a mortgage. And so that you can address it satisfactorily according to your needs, here SPV Mortgages are going to tell you how it is decided and why.

What is a mortgage?

Before talking about the interest rate of a mortgage, it may be convenient to clarify what a mortgage is. It is defined as a loan whose payment is guaranteed by the value of a property. Therefore, the applicant may have a significant amount of money in order to buy a home or rehabilitate it.

But, logically, the bank formalizes this loan through a contract, in which the mortgage debtor agrees to repay that amount together with the corresponding interest (according to the agreed interest rate) by paying periodic instalments. And to obtain guarantees on this return, the client also offers the property that he is going to acquire as his own guarantee of payment.

To understand what a mortgage entails, one must know its three basic elements :

The capital

It is the amount of money that is requested from the bank to be able to buy the house. Usually, it corresponds to 80% of the appraisal of this if it is the first one that is acquired and 70% if it is a second home. While the other 20-30% must be provided by the buyer at the beginning as an entry.

Mortgage interest

The bank offers this loan to the buyer with the aim of obtaining a benefit in the medium and long term. Therefore, interest is the positive difference (from the creditor’s point of view) between what it initially contributes to complete the payment and what it will receive in total from the mortgage holder once it completes its payment.

Amortization period

As we have just seen, the buyer acquires a debt with the bank when contracting his mortgage. So, at the time of signing the contract between the two parties, the repayment period of a mortgage is defined. That is the time in which both the borrowed capital and its interest must be returned.

Under normal conditions, it is usually a period that oscillates between 20 and 30 years, although it may be shorter or longer depending on the characteristics of the contracting party and the amount to be paid.

The interest rate of a mortgage: what options are there?

When committing to a bank, it is also important that we determine what the mortgage interest will be. Mainly, because the bank itself can offer us three different ways.

Fixed-rate mortgage

In this case, the bank sets a stable mortgage interest rate from the beginning. Therefore, it does not vary over time nor does it depend on external factors. Its advantage is that the client knows, from the moment he signs the mortgage contract, the instalment (generally, monthly) that he will pay until its completion.

While the negative is that this instalment usually has a higher fixed interest than the initial interest of variable-rate mortgages.

Variable rate mortgage

This modality uses a reference index, to define the amount that the debtor must pay. But it is not determined day by day, rather the bank and the client previously agree on the review period (usually every 6 or 12 months) to determine the interest that the rental fee will include.

Its advantage is that, in low rate periods, the amount to pay is usually not very high; but in return, quite a few risks are assumed and it is possible that, if the payment is long-term, you end up paying more in total.

Mixed interest rate mortgage

Here the debtor begins by paying a fixed interest during the first two or three years and, from there, his instalment is defined according to a variable interest. Due to its characteristics, this option usually presents a lower fixed interest than in the case of contracting a 100% fixed-rate mortgage, so it is advisable for those cases in which the client is confident that they will be able to repay their mortgage in the first years of the period at a variable rate.

Your personal situation is key to making the final decision

In short, if your monthly income is not very high and you have the prospect of paying your mortgage in 20 or 30 years, the most advisable option for you will be a fixed-interest rate mortgage.

It has the disadvantages that its interests are more expensive from the outset and that subrogating your mortgage will be more expensive; but in return you will have the security that you will always pay the same, regardless of what happens with the bank.

While if your salary offers you a high margin to pay your mortgage, you want to pay less at the beginning and you are not worried that it is signed to be amortized in a very long term (between 30 and 40 years), you can opt for the variable.

In the event that the fee experiences large increases, you will have the financial cushion to pay what is required of you; and you can even consider saving to pay it off in advance in order to reduce the terms and, therefore, also the risks.

When committing to a bank for a mortgage, one crucial decision is determining the interest rate. There are different options available: fixed-rate mortgage, variable rate mortgage, and mixed interest rate mortgage. Your personal financial situation plays a pivotal role in making the final decision. If you’re interested in exploring the real estate market further, particularly in Atlanta GA condo market, it’s essential to consider these factors.