Fixed and Variable Mortgage Rates for First Home Loans Easily Explained

You go to your local friendly loan shark (we'll call him Vito) and ask to borrow 100 bucks. Vito says, in a friendly manner, "Sure, no problem!" he explains about the insurance and tax he has to charge you, just in case you never show up again or your legs get broken.

You say, "Okay, no problem". He says it will cost you 50% interest for 1 month (banks are a little more lenient). Again you say, "Okay, no problem". But wait, what does that mean?

It means that for every week that goes by you owe him 50 buck a week extra for loaning you the money. So for the month you pay him 200 buck on top of the 100 bucks you borrowed. That's 300 bucks you now owe him at the end of the month. Not bad you can handle that.

But wait...

The end of the month rolls around and you only have 250 bucks. You take it to him and Vito says, "No problem! Take another month to pay me." So you give him the 250 bucks and now you owe him 50 buck and get another month to pay him. It takes you two weeks to get the 50 buck up and you take it to Vito and he says, "Okay, no problem". BUT...

You still owe me 100 bucks for the extra two weeks (50 bucks a week) plus insurance rates have changed so now you owe me 75 bucks per week (50 bucks plus 25 for insurance). I'll give you another month to pay.

It takes you 3 weeks to get the money (that's now 375 bucks you owe) together and you go to Vito and give it to him and he says, "Perfect we're even. And thanks for the business". But wait! Insurance rates fell the last two week so now I owe you some money. Vito gives you back 50 bucks as a refund. You're ahead in the game by 50 bucks. Or are you?

All the extra money you gave Vito is his payment for loaning you the money it's called interest. That's how he makes his living.

Since Vito is an honest loan shark he gives you a refund because insurance rates fell and it didn't cost him as much to insure you. It works the same way with taxes.

If you pay too much during the year you get a refund but if you pay too little then your monthly payment changes accordingly.

Mostly your payment pretty much stays the same throughout the life of your first home loan. And that's the way banks work with a fixed mortgage rate.

Banks are not quite this bad for your first home loan on a fixed mortgage rate. They keep track of rates but on a fixed mortgage rate they only pay attention to the extras like insurance, taxes, etc.

Well, I hope this make it plainer than the official version.

Okay, we'll visit Vito again for this. It's a little more complicated but Vito will help us through it.

You visit Vito, our local friendly loan shark, and ask for a loan of 10,000 bucks but you want it as a variable rate loan and you want to pay it back over 5 years. So Vito pulls out a sheet of paper called a schedule and says, "No problem". We know... rrrr...mmm...that is, we guess the rates are going to change every month until the loan is paid back. Once around the 15th and around the 29th in the second month, the 15th on the third month and so on, so from here we'll work it. Okay? You say, "Sure?"

This schedule or index is what's called, will change the amount of your payments. So you borrow the 10,000 bucks from Vito and go on your marry way. This time you agreed to pay Vito on a monthly basis.

So every month you pay him around 290 bucks (I'm rounding this out)-this is plus the interest. So you pay Vito 290 bucks every month until Vito's schedule changes every month.

When the 15th rolls around his interest schedule changes. So now you owe Vito 214 buck--that's plus interest. Hey, your payments are less than last month. That's great! The next month rolls around and you have the 214 bucks but your payment is now 450 bucks. Hey! What happened?

Well, Vito's schedule changed again. And the next month it's goes down to 275 bucks and the next month it goes up to 550 bucks. This is how adjustable mortgage rates work.

Yes, this is a little exaggerated but I hope you get the point. Sometime variable mortgage rates are not the best way to go. They are for Vito but your pocket book is going to feel the loss.

A variable mortgage rate and an adjustable mortgage rate are the same thing just with different names.

If you know that your credit is shaky, check into your credit score. You can get your credit reports for free; sometimes you can get it from your bank for free or some other agent. This is a strategy to help you fix your credit in preparation for applying for your first home loan. Just be sure to check out the reputation of the counseling agency, as there are some agencies that are fraudulent.

There are also community services offered by state and local governmental agencies that can teach you how to start shaping up your finances to qualify for a good rate. They might have a program where you can buy a house for less than 20% down payment and some cities will even pay your down payment. For more information checkout How To Get Your First Home Loan.