Buying a house is a huge monetary investment. Above that, if you are someone raising a loan for the same, it adds a big long-term financial responsibility on your shoulders. Therefore before making any decision on the type of loan you want to raise, it is important to analyse the types of loans available and the interest amount payable on such loans. For the unversed, there are two primary forms of mortgage loans: Fixed rates and adjustable rates available to be raised as home loans.
The Initial Interest Rate is the opening rate that is charged on an adjustable rate or floating mortgage. Also known as the teaser rate, it is a lower interest rate offered as compared to fixed-interest mortgage loans. In the case of floating mortgages, the lender has the right to increase the rates after the introductory period is over. Any subsequent increase after that is made periodically based on when certain benchmarks are met.
Floating mortgage loans are most often opted for by buyers who do not wish to pay high-interest loans in the initial period. This is because they might have plans to refinance their loan once the introductory period is over. They could also hope for the interest rate to decline, depending upon the lender, who would choose to retain the loan. It is done in return for revoking most of the incentives of a borrower to refinance in the further future.
Some other key features of Initial Interest Rates are:
The first interest rate is adjusted according to the initial interest rate cap. It is the maximum amount of interest that can be increased on the first rate adjustment. It protects the borrower from any extreme rate change right after the introductory period.
Any further change in the rates is based on the periodic interest rate cap.
Lenders change the rate based on various third-party benchmarks available for reference.
Two of the most widely used benchmarks are the one-year London Interbank offered rate and the prime rate that is published by the Wall Street Journal.
The London Interbank offered rate aggregates the rates offered in the international markets and updates the same daily.
The lender is obliged to disclose their choice of the index at the beginning of the loan period. They can also add their own margin between 1-3% on the said index.
