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All About Interest Rates

Interest is the amount of money a finance institute charges you for loaning you the money for a mortgage. Interest is front-loaded on a mortgage, which means that for the first couple of years you are mainly paying interest. Look on the bright side: the interest money you pay is tax deductible.

Why do rates go up and down?
The answer to this question is very complex. Basically, the rates go up when money is tight and there are too many people trying to borrow money. Therefore, the lenders can be picky about who they lend to. When money is not tight or there are not too many people trying to borrow money, the rates come down. The economic climate is a good indicator on whether the rates are high or low. If the economy is not doing well, people generally will not be looking to purchase homes and the rates come down. On the other hand, when the economic outlook looks bright, people will generally want to spend more and buy homes. Thus, the rates go up. Listening to the advice of the chairman of the Federal Reserve board can be helpful in determining whether the rates will go up or down or remain the same. The rates may increase or decrease throughout the course of one day. This can occur though it's not common. There are many places to check the current rates: the local and national papers, at the lending institutions and on the Internet at sites such as www.bankrate.com.

When you apply for a loan, the lender may ask you if you wish to lock in the loan with the current interest rate or to float the rate. What does it mean?
A lender will generally ask you if you wish to lock in the interest rate for up to sixty days. This means that if you close on your home within sixty days, the interest rate on the day you locked it in is the interest rate applied to the loan. If however you do not close within sixty days, the current interest rate will be applied to the loan. This may be higher or lower than when you originally applied for the loan. Remember the longer the lock in period the higher the interest will be, because the lender needs to protect himself in the event rates skyrocket.

You may also tell the lender that you wish to float the rate until closing which gives you the option of locking in at any time within the sixty days. If you believe interest rates will go down this may be a good option. However, the rates may go up so it can be somewhat of a gamble.

A word of caution -- always get the lender to put everything you agree to in writing. This includes whether you are locking in or floating a rate.

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