4 Types of Mortgage Interest Rates

Once you’ve chosen the type of mortgage loan that best suits your investing venture, the next decision you’ll need to make is the type of interest rate you’d like.

Luckily, there are a few different options to choose from, each impacting your monthly payment, amount of interest paid, and payment timeline.

Not sure what your options are? Here are four types of mortgage interest rates:

Fixed

With a fixed interest rate, the interest rate will remain the same for the loan duration (unless the lender changes it). By this, we mean that the market does not impact the monthly payment.

A fixed interest rate is a popular choice for buyers who want to pay the same monthly payment. While the monthly payment of a fixed interest rate stays more consistent when compared to a variable interest rate, a fixed interest rate is typically higher when the loan is originated.

Adjustable

With an adjustable-rate mortgage, or “ARM,” the interest rate is subject to change over time based on the market.

While the monthly payment can change for an adjustable rate, the interest rate is typically lower at the beginning.

Variable

The terms “variable rate” and “adjustable rate” are often used interchangeably. While these interest rates are very similar, they are a bit different.

With an adjustable interest rate, the monthly payment can change with the market as interest rates fluctuate. The monthly payment of a variable interest rate won’t change as the market fluctuates. Instead, the amount of the monthly payment that goes toward the principal vs. interest will change.

Like the adjustable rate, the variable interest rate will be lower at the beginning of the loan than a fixed rate.

Step Investment

Also referred to as a “step-up,” a step investment rate starts at a lower interest rate and increases periodically.

The amount and timing of the rate increase will depend on the mortgage terms.

Which Interest Rate Type Will You Choose?

Choosing an interest rate for your mortgage loan isn’t a one-size-fits-all solution.

Once you’ve narrowed down your options, consider doing additional research to determine which interest rate best suits your needs.

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