Friday, March 04, 2005

How to use the Variable vs Fixed Calculator

Fixed rate and variable rate mortgage definitions

In order to make an informed decision using the calculator you need to familiarize yourself with the terminology.

Fixed rate home mortgage loans are self-explanatory. The rate is fixed for a specified period up to 30 years. Other variations are 20 and 15-year amortization periods.

An variable rate mortgage starts at an initial rate, sometimes referred to as the teaser or honeymoon rate, and stays fixed for a predetermined period say 1 or 3 years. After that period the lender will add the index with the margin and compare it with your start rate. If your start rate is lower than that number then your rate will be increased by the difference not exceeding your mortgage loan's cap.

Terminology:

- Start Rate is the rate at which the initial payments are calculated.
- The start rate may be fixed for 2, 3, 5, 7 or 10 years.
- Index is a number derived from financial markets, which is a reflection of prevailing interest rates.
- Margin is a polite way of referring to the lenders profit margin.
- Adjustment Period is the period after which the mortgage loan will adjust. This for initial fixed rate period loans can be two different periods, initial and reoccurring.
- Adjustment Cap is the cap that is placed on any periodic adjustments.
- Life Cap is the maximum rate above which a rate may not rise, normaly set at 6% over the start rate in the USA but doesn't usually apply in Australia.

Click here to use the loan calculator...