February 13, 2018
If you are tuned in to the news, you know that interest rate changes frequently. Do you know how it impacts your finances?
To understand why and how the rates are changing, it’s important that we discuss short-term and long-term rate. In general, the Central Bank lends a short-term interest rate to other commercial banks at the end of one business day and the start of the next to balance their finances. But in other cases, some banks can borrow money for a longer period of time.
People who opted for a fixed-rate mortgage will have longer-term interest rates, usually tied up from two to seven years. Whatever happens to the short-term interest rates, borrowers need to pay the same fixed rate until the end of the agreed period.
In general, long-term rate is usually higher than short-term rates. The idea is it will be riskier to lend someone with money which will be paid within a 30-year span rather than lending the same amount to be paid for a few days. This means that the higher interest rate in a long-term loan is to offset the risk involved.
If the Central Bank has an increase in interest rate, it can immediately affect the variable rate mortgages. The short-term interest rates have a direct impact on the interest payable on variable rate mortgages. This means that when the short-term rates rise, the variable mortgage rate shoots up as well. A rise in short-term interest rates can also effect on discounted loans.
However, if the short-term rate continues to rise this could be a sign that the long-term interest-rate can also escalate over time. This could mean that when you renew your fixed-rate mortgage, you will receive a higher interest rate than your previous term.
Again, perfect timing is the key to avail of a lower interest rate to lock in your fixed rate mortgage. Purchase a hillsborough ca homes for sale and get approved for a fixed-rate mortgage while the interest rate is still low and before the market begins to favor an upward trend in the interest rate.
Opting for a fixed-rate is not for everyone and its benefits may not favor all who chose it over adjustable rate. Talk to your financial adviser to help you decide the best mortgage to suit your needs.