Mortgage interest rates are one of the most important elements a home buyer must be aware of when considering borrowing money for a home loan. . In simple terms, an interest rate is the annual percentage that the borrower is charged on the loan they obtain. Mortgage rates vary based on several factors including the cost of funds to the lender, type of mortgage, term of mortgage and the creditworthiness of the borrower. 

There are generally three types of mortgages: fixed rate mortgage, adjustable rate mortgages (ARM) and hybrid mortgages.

1)      Fixed rate mortgages– have a specific interest rate established at the beginning of the mortgage and the rate remains the same throughout the term of the mortgage.

2)      An Adjustable Rate Mortgage (ARM) has an interest rate that adjusts periodically, according to terms mutually agreed upon between the borrower and the lender at the time the loan is made. Adjustment periods may range from months to years. Many ARMs have rate caps so interest rates can only raise a maximum percentage.  Additionally there are floors which prevent rates from declining below a minimum percentage. The intent is to prevent severe fluctuations in rates and the corresponding monthly payments paid by the borrower.

3)      A hybrid mortgage has elements of both fixed and variable rate mortgages. The hybrid mortgage may begin with a fixed rate for a period of time, generally in years. At some point in the future, the rate may become variable. However a hybrid mortgage may begin with a variable rate for a period of time and the borrower has the option to “fix” the rate at some time in the future for the remainder of the mortgage term. 

Evaluating interest rates associated with different type of mortgage products can be a confusing and time consuming process.  We strongly recommend that you invest the time to educate yourself by researching your mortgage lender and selecting someone who will take the time to explain in detail the various mortgage rate options available.  Rate is one of several important factors when selecting a home mortgage.