Finance Review

Interest Rates, Floating Mortgage and Fixed Rate Home Loans

Today with the economy the way it is, everyone is looking to save anywhere they can. For this reason, many homeowners are choosing to refinance. Just as many first time buyers are seeking the best interest rate on a loan they can find. The following will help all those in search of a loan and the different options available, outlining the disadvantages and advantages of each.

Interest Rates

What interest rate refers to is the cost for borrowing money. Interest rates will affect the floating rate through the bank bill rate which is held for 90 days and which is also influenced by the OCR or the Official Cash Rate. This is issued by the Reserve Bank in order to influence the bank bill rates of 90 days. Sound confusing? Well, consider this, the Reserve Bank is in charge of controlling inflation by keeping the inflation rate between a 0 – 3% band. Meaning interest rates vary depending on the state of the present economy. With more spending in the economy, the interest rate is pushed up. When the spending is low, the interest rate is decreased. When the interest rates are decreased, this in turn increases spending. So, the vicious cycle is somewhat diminished. The RB then lowers the Official Cash Rate which then allows people to spend, once again.

How to Forecast Interest Rates

Economics

Well, anyone who is aware of the economy is definitely aware that it fluctuates. And, there is no sure prediction as to the future. However there are many factors to take into consideration, which change the picture, quickly. For instance, if the United States dollar drops this will result- typically anyway, in a lower TWI also known as the Trade Weighted Index, which in turn is responsible for importing inflation which results in an increase of consumer/domestic consumption and causes the RB of NZ to raise the Official Cash Rate, which sends the interest rates up for the short-term anyway, and decreases those seeking credit, or the demand. Interest rates will change accordingly subject on the present state of the economy.

For this reason, many experts suggest placing 25% of a loan on the floating rate and financing the remainder of the loan on a fixed rate of one to three years.

Floating Rates

Floating mortgages are influenced according to how the current interest rate is moving. The borrower will be interested in watching the changing mortgage rates through the bank bill rate of 90 days. Two important considerations about floating rates are:

1. Should the interest rate go up, so does your loan repayments. Just as when interest rates go down, so will your repayments. This can be a great advantage when the economy is tough and interest rates are falling, but it will be the opposite effect when they are rising.

2. There is no penalty for early payments.

Fixed Rates

With the fixed rate mortgage it is a fixed rate for an agreed amount of time. The agreement may be from six months to seven years. And, with the fixed rate mortgage you will want to take into consideration:

1. The payments are fixed and the same for the fixed rate period, knowing what your payment will be.

2. When the interest rates fall, your payment will be the same.

3.Penalties are charged for early payments, increases in payments or lump sums.

Study the loan carefully. Banks can make a very good profit on these loans, especially depending on the economy.

Split Loans

A split loan is based upon a portion of the floating and the fixed rates. Meaning they can represent the best of both world. A few things to consider with the split loan:

1. Changes in prepayments don’t occur, because this is a mix of the interest rates.

2. You can repay lump sums onto your mortgage without penalty

Ethan Sansbury writes for Schuylkill Mortgage http://www.schuylkillmortgage.com/pa-mortgage-rates, a mortgage brokerage that services all of PA. For more details on PA mortgage rates please visit their website http://www.schuylkillmortgage.com.

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PA Mortgage Rates

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