Howdy Wall St. Willy! Earlier you talked to me about a mortgage. But I want to know about the different kinds of interest on a mortgage. Can you tell me about that?
Of course, I can. The different types of interest for a mortgage are mainly fixed interest or floating interest. Floating interest is also called Adjustable Rate Mortgage or ARM.
Well, what is a fixed interest rate?
The fixed interest rate is decided at the time of the loan and it’ll stay the same for the whole term of the loan.
What is a floating interest rate? Does it float on water?
Yes, it does float on water. Just kidding!
The rate of interest is linked to a benchmark like the LIBOR or another index like a stock index. The rate is also decided when you take the loan but it may change every year.
So, if the benchmark goes up, the rate goes up. The same way, if the benchmark goes down, then the rate goes down too.
Well, what happens if the rate changes?
Then the monthly payment can go up or down depending on how the rate changes.
Is there a maximum interest rate or can it go up to anything?
No, there is a cap, which means there is a limit on how much the interest rate can change every year and what the maximum rate can be.
Well, floating interest rate sounds very risky. Why would anyone want it?
Well, people might want a floating interest rate because the starting interest rate is usually lower than in fixed interest and there’s always a possibility of the interest rate going down.
Yay!! Anyway, is there any other kind of interest rate for a mortgage?
Yes, there is a hybrid. A hybrid rate stays fixed for a certain number of years, usually 5, 7 or 10 and then, after that, it might change every year.
Well, who decides if the rate should change or go up or down for a floating interest rate?
The bank will, depending on the changes in its benchmark, which we talked about earlier.
Who decides the kind of interest rate for the mortgage? Fixed interest rate or floating interest rate?
You do. The person taking the mortgage.
Well, if I take a mortgage then which one should I pick? Fixed interest rate or floating interest rate?
It depends on your financial situation but that’s a topic for another time.
Thank you very much for telling me about the interest rates for a mortgage, Wall St. Willy.
You are welcome, Sooper Cooper. Remember, Finance is Your Friend!
Podcast: Fixed vs Floating Mortgage Interest Rate
Everything you need to know about Fixed and Floating (or adjustable – ARM) interest rate for mortgage: what is a fixed interest rate, what is a floating or adjustable interest rate, what happens if the interest rate changes, is there a maximum rate for floating or adjustable interest rate, what are the advantages of a floating or adjustable interest rate, who decides if the rate should change or go up or down for a floating interest rate, who decides the kind of interest rate for a mortgage, and more.
Show notes and transcript at: Comparison: Mortgage Interest Rate – Fixed vs Floating / Adjustable (ARM)