Home Equity Vs. Conforming Mortgage Rates
- Companies offering fixed rate conventional mortgages lock in the interest rate for the entire term of the mortgage. Borrowers choose fixed-rate mortgages for their predictability. Often fixed-rate mortgage interest rates are higher compared to other conventional mortgage rates because of their stability.
- Adjustable-rate mortgage rates are based on two key indicators. The first is the margin. The mortgage lender discloses the margin in writing on the mortgage note. On conventional mortgages, the margin is often set at 2.25 percent. Adjustable-rate mortgages also require an index. The index is the financial market upon which the lender bases its rate. Conventional mortgage lenders base their adjustable-rate mortgages on the one-year London Inter-Bank Offer Rate (LIBOR). When the adjustable-rate mortgage adjusts, the lender adds the current one-year LIBOR rate to the margin. Their sum equals the new interest rate. Usually conventional adjustable-rate mortgages adjust once a year after the initial fixed rate period expires.
- A HELOC works like a credit card secured by the home. Most HELOCs are adjustable, and hence they also require an index and margin. Often HELOC mortgage contracts allow the lender to adjust the interest rate on a monthly basis. Most HELOC mortgages use the "Wall Street Journal"'s prime rate as their index. Some HELOC lenders offer negative margins, which provide an interest rate lower than the index. These loans are rare.
- Typically, the HELOC requires a higher interest rate than a conventional loan. Many HELOC lenders require interest-only payments on their HELOCs and do not require the homeowner to make principle payments each month. HELOCs also allow the homeowner to access the line of credit continuously during the draw period. If the homeowner pays down the principal balance of the HELOC, the payment will drop the following month. Most conventional mortgage loans do not offer these options. Conventional mortgage lenders only change the payment amount on adjustable rate mortgages, which typically can change once a year.
