How Low Mortgage Rates Work

Here is all the information you'll need to know about low mortgage rates and the lending process.

Types of Mortgages

When you're shopping for low mortgage rates, you'll encounter two primary types of mortgages: fixed-rate and adjustable-rate mortgages (ARM's). Each type is explained below.

Fixed-rate mortgages: these loans can offer low mortgage rates that remain the same for the life of the loan. You will have the security of knowing your rates and monthly payments will stay the same for the loan's term. Fixed-rate terms usually range from 10-40 years. Fixed-rate mortgages are a good idea when interest rates are expected to rise. Fixed-rate mortgages are best for those who:

• Plan on staying in their home a long time (at least five years)
• Want consistent payments without fluctuation surprises
• Have limited or fixed incomes
• Are taking out a mortgage when interest rates are relatively low

Adjustable-rate mortgages: an ARM comes with fixed low mortgage rates for an initial period that lasts from 1-10 years. After this initial fixed period, interest rates will adjust according to market conditions. Initially, an ARM can offer low mortgage rates that are more competitive than those of a fixed mortgage. The lower initial monthly payments make an ARM ideal for people who:

• Want to buy a more expensive house
• Would like to improve credit standing (low initial payments help you improve credit initially by easing your payment burden)
• Want to improve cash flow in high-interest-rate market
• Plan to experience income growth in the near future
• Want to save money before they move or refinance

Review our ten homebuying steps before you start the process.

Mortgage Terms

Just as important as low mortgage rates are mortgage terms. A mortgage term refers to the amount of time you will spend repaying the loan. The most popular and most common mortgage term is 30 years, though you can also choose from other options. Some lenders offer low mortgage rates with a 40-year term to minimize monthly payments. For people who would like to pay their mortgages off more quickly, there are also 10-, 15-, and 20-year mortgage terms. Remember that mortgage terms always involve a trade-off. Longer-term loans offer lower monthly payments for those on tight budgets but will result in more interest expense paid over the life of the loan. Conversely, shorter-term loans have higher payments but allow you to build equity in your home and pay off your mortgage faster.