Low Interest Rate Mortgage Loans Aren't Always What They Seem


Not all low interest rate mortgage loans are the same. If the mortgage is a low fixed rate loan, then that presents an attractive option. However, a loan with a low initial interest rate which resets higher can often prove to be a trap with the borrower as its prey. Knowing what the various terms of a mortgage is important to avoid this happening to you.

Some mortgages have what is called "fixed rates". A fixed rate mortgage has an initial interest rate which never changes. You can know with certainty what your mortgage payment will be during the life of the loan. This enables you to plan for family expenses and budget. You can also ensure that fluctuations won't put you in that reset trap.

Other mortgages have interest rates which fluctuate with the market. These are called adjustable rate mortgages. They can have initial rates which are deceptively low. They are low for a short time then can skyrocket up quickly. This can prove to be a disaster if the increase in the interest rate puts the payment above what you can afford.

Especially nefarious are loans with what are called "teaser rates". These are very low initial rates which can actually be under 1%. This serves to tease the borrower into the loan when just looking at the very low initial payment amount. Then the rate increases dramatically and often times the homeowner quickly enters foreclosure. Do not let this happen to you. Avoid teaser rate loans.

Another way lenders have tried to manufacture an artificially low payment amount is to extend the duration of the loan. Traditionally, mortgages have been for 30 year terms. Then, in order to lure in borrowers, lenders started to extend these terms to up to 50 years. This serves to lower the monthly payment. However, it also reduces any principal repayment which keeps down the equity you develop. Most experts advise sticking with the 30 year mortgage.

When you get a fixed rate it doesn't mean you are stuck with it forever. If interest rates were to go down in the future, then you can lower your rate with a refinancing. Having a 30 year term allowing for accrual of equity will help you towards this end when the time comes. If interest rates go up with a fixed mortgage you are protected. Yours can never be raised.

Some mortgages can be confusing in that they have a low interest rate but high points and fees. You must read the fine print and determine all mortgage fees which you will be charged. Many times the effective rate is much higher than it appears on its face. Find out what the effective interest rate is on the mortgage when including all fees and points. If you can't decipher this yourself ask for guidance from a trusted professional.

Low interest rate mortgage loans can be tricky. You must read the fine print carefully in order to determine if the interest rate is truly low or just a gimmick. Unfortunately, many borrowers in recent years have fallen for these tricks with the result being one of the foreclosures you read about in the papers everyday. Don't be tricked into becoming one of them.