Six months ago Magical Penny was just an empty blog template waiting to come to life.
It’s been an amazing journey so far and I’m honoured to have you as a reader – I really appreciate that you’re here today, particularly as there are so many amazing things to read both online and in the off-line world.
Over the last six months I hope you’ve found Magical Penny helpful in working out how to stay on track to reach your own goals, whatever they may be, and that you’re beginning to think of investing as not as scary as you may have first thought.
I’m currently away from home doing one of my favourite things in the world – singing with friends -but when I return I’m planning to celebrate this blogging milestone in style with lots of fresh content and give-aways and prizes for those of you on my newsletter list so if you’re not on it already, sign up today!
Have a wonderful weekend and thanks again for being part of Magical Penny.
Other Great Reads for the weekend
Carnival of Personal Finance #267 at Beating Broke
Carnival of Money Stories #64
Check out the festival of frugality magazine edition @Winformatics http://bit.ly/8X95dI
Buying a house is something I think many people rush into without realising the implications of making what likely is the most expensive thing you’ll ever buy.
It’s a more advanced financial topic that Magical Penny will be exploring in the coming months. However for those of you who are about to buy a house or are considering refinancing my friend Alban has written a 2-part guest-post on one of the more important aspects of buying a home: financing.
Part 1 can be found here
Today in part 2 Alban looks at Fixed Interest Rates:
Note: This is US-centric article but those of us in the UK will still get a great deal of value from it. The UK mortgage market is mainly variable-rate offers. Fixed rates are available but longer terms are much harder to find than in the US.
Over to Alban….
Fixed Interest Rates
Many lenders will allow you to choose a fixed interest rate period which you are comfortable with and this could be from as short as one year, up to the full 30 years of your loan term. If you have taken a look at official interest rates and can see that they are at one of their lowest points then you could benefit from locking in a fixed interest rate on your loan to keep your repayments lower as well. Just keep in mind it is not always the best time to choose a fixed interest rate loan because official rates follow a cycle and may be low to encourage you to spend locally, however rates rarely stay low for very long and will be readjusted to standard levels.
Advantages of a fixed interest rate home loan:
- Once you apply for and settle your fixed interest rate home loan rates will remain the same for the entire term we have chosen. This means that your repayments will also stay the same, allowing you to manage your budget into the future without having to worry you will need to dip into your emergency fund just to pay the mortgage. If you like to be able to accurately plan your finances, or if you need to stick to a tight budget then knowing exactly what your repayments are going to be throughout your fixed rate term can offer you the stability you are looking for.
- Also because you are agreeing to pay a slightly higher interest rate in exchange for their monthly mortgage repayments you often need a lower down payment and rather than having to pay 10% or 20% deposit you may only need around 5% of the purchase price to secure a fixed interest rate loan.
Disadvantages of a fixed rate home loan:
- If you decide during your fixed rate term that you want to refinance your home loan you can be charged much higher break costs to exit a fixed rate home loan than you would be on a variable-rate loan.
- Also if you fix when interest rates are not at their lowest, when they start to decrease on their cycle then you will still be paying a higher interest rate and a higher loan repayment.
How To Choose A Fixed Interest Rate
Benefiting from a fixed interest rate home loan is all about making sure you fix at the right time. You want to fix when rates are at their lowest for when they have just started to rise from the bottom of the cycle. At the same time you need to make sure to shop around because each lender has their own opinions on how fast and how far interest rates are going to rise and fixed interest rate offers can differ significantly so take the time to find the lowest rate.
The term you choose depends on when in the interest-rate cycle you fix. Three to five-year fixed interest rate terms are often of the most benefit because if you fix for a shorter period than this you may be paying the higher fixed interest rate without seeing much protection from rises during this time and if you fix for longer you may miss out when interest rates begin to fall again. You can also choose a fixed interest rate term based on your circumstances and your future and you may choose a shorter to medium-term fixed rate until you have built up your savings account again after making your down payment on your loan, or until you are able to move ahead in your career.
Understanding the differences and benefits of both variable and fixed interest rates is just one part of your home loan comparison because you now need to look at your budget, your future and the interest rates on loans on offer from each lender.
Alban is a personal finance writer at Home Loan Finder, where he advise people on the best fixed rate home loans
Thanks Alban for guest-posting.
If you would like to offer a new perspective to Magical Penny readers do get in touch: adam AT magicalpenny.com
Tagged as:
financing,
mortgage,
mortgages
Buying a house is something I think many people rush into without realising the implications of making what likely is the most expensive thing you’ll ever buy.
It’s a more advanced financial topic that Magical Penny will be exploring in the coming months. However for those of you who are about to buy a house or are considering refinancing my friend Alban has written a 2-part guest-post on one of the more important aspects of buying a home: financing.
Note: This is US-centric article but those of us in the UK will still get a great deal of value from it. The UK mortgage market is mainly variable-rate offers. Fixed rates are available but longer terms are much harder to find than in the US.
Over to Alban….
There are many variables to repaying your home loan easily and saving money along the way. The loan amount, deposit amount, loan features and lender service all impact on your journey as a mortgage holder, but the aspect of home loans which many people are most focussed on is their interest rate, so focus your attention here on the advantages of fixed and variable interest rates and learn how to make an informed decision on one of the most high profile of loan features.
Home Loan Features
Home loans are a competitive market and where there was once a great divide between variable and fixed rate loans, the gap is closing. Variable interest rate loans, also known as adjustable rate mortgages, were typically the sole domain of offset accounts, redraw facilities, and were the only loans which allowed you to make additional repayments. In taking the time to shop around for a home loan you may be able to find a loan with your choice of interest-rate and features whether you are after a fixed or adjustable loan.
The interest rate is such an important feature to consider, because while you may now be able to get traditionally variable rate loan features on a fixed interest rate, the difference between the rates on each loan can differ significantly. For example of the current average adjustable interest rate is 4.19% where the average fixed-rate is 4.88% and this can mean a difference of hundreds a month in your repayments.
Adjustable Interest Rates
Adjustable interest rates seem to be the better option at the moment, and historically variable rates tend to be between 0.5% and 1% lower than an equivalent fixed interest rate. At the same time you need to consider the advantages and disadvantages of a variable interest rate loan according to your own circumstances.
Advantages of variable interest rate home loans:
- It is common to be able to find low introductory interest rates on a variable rate loan. These lower rates may be charged for anywhere from one month to 5 years and can save you hundreds as you settle into the routine of repaying your new loan.
- Even at the end of an introductory period your adjustable interest-rate can continue to save you money on your loan if official interest rates stay steady or drop. This is because variable interest rates are adjusted according to changes made to the official interest rate to manage the economy, as well as based on your lender’s decision on whether to match official rate movements.
- When choosing the type of variable interest rate you can choose one which is adjusted just once a year, and is also capped per year and for the life of the loan. This means that while you will be able to enjoy decreases in your home loan interest-rate you will also know the maximum amount your rate will rise to as your rate may be capped at 2% per year and 6% for the life of the loan so if you apply for an adjustable rate loan at the current 4.19% you know that over the life of your loan you will never be charged much more than 10% interest but during times of falling interest rates you can make considerable savings.
Disadvantages of having an adjustable interest-rate:
- Your home loan interest rates can be adjusted periodically depending on your lender and may vary each month, quarter, year, three years or every five years.
- An adjustable interest-rate varies depending on the index and the margin. The index is a measure of official interest rates, and the margin is the extra amount which your lender adjusts. Therefore you could see a rate adjustment if official rates affect your index rate, or your repayments may increase if your lender adjusts their margin. At the same time while the index rate may move down your adjustable interest-rate may not adjusts downwards and this is something you will need to check with your lender.
How To Decide On A Variable Interest Rate
It is easy to be attracted to an adjustable rate mortgage because of a low introductory rate and lenders know this. That is why if you are applying for an ARM with a low rate initially, you may have to specifically ask your lender to see their annual percentage rate as this is the rate your loan will revert to after the introductory period.
It is also important to remember that when the economy is uncertain lenders will try and take advantage of this panic as well, because many people look to fix their interest rates during unstable times and so fixed rate loans tend to be much more expensive. As a result if you are able to leave your loan at a variable rate during such times and ride out any instability you can save hundreds or even thousands. To help you decide whether you can weather such a storm calculate your repayments using a stress rate of around 2%. The stress rate will show you how much your repayments would be if your adjustable rate rose by 2% and this is a common calculation used by lenders to assess your suitability for a variable rate loan. You can then take your new higher loan amount and see how it would fit into your budget to help you decide whether a variable rate home loan is right for you.
Since your variable interest rate could be on the rise in the future, think about what else might be in your future. Things like car loans or private school expenses can change your budget dramatically and if your circumstances are likely to change make sure you can budget for this as well. Many people who choose an adjustable interest rate loan do so to take advantage of a low initial interest rate, because they know that their income will be increasing in the future. Therefore if you are a first home buyer or plan to excel your career then you may be able to afford to slightly higher costs of a flexible home loan rate, as well as benefit from falling rates in the future.
Alban is a personal writer. He provides information on property investment and helps people choosing the best refinancing loan
Check back on Wednesday for the advantages and disadvantages of fixed rate loans.
Tagged as:
buying a home,
financing,
mortgages
Life is made up of thousands of ‘todays’
And today is always busy isn’t it?!
If you are to be successful at anything, whether it’s growing your pennies or becoming more productive, it’s what you do consistantly every day that will make all the difference in the world.
We make thousands of decisions each day and we find ourselves prioritising one thing over another all the time.
What do you prioritise?
Sometimes you might be tempted to put things off because you want to do a ‘proper’ job of them; to give the tasks the time they deserve. The trouble is you risk putting off important tasks:
Maybe you’re waiting until your next payrise to sort out your finances, or you’re waiting until you have an empty weekend to start reading that book that will help you in your career?
What I’ve found, however, is that it’s too easy to put things off until you feel ‘ready’. I know I have lost countless opportunities in the past because I’ve not felt ‘ready’. I bet you have too.
Priorities
To use a very meta example, I’ve made it a priority to work at being a personal finance blogger:
Not just when I have a bit of spare time, but consistantly. I’m writing every day and publishing to this site three times a week. Today’s post is a perfect example of such a priority (given my current workload the time spent writing this is a priority over sleep).
But what about you? What are your priorities and are they really your priorities?
Do they get pushed aside when life gets busy? Or how about your financial plans and goals? Are they regularly missed due to constantly changing circumstances or spending whims?
The true test of a priority is if you answer yes to the question “Am I working towards this priority today?” Say yes often enough and your priorities will begin to shape your life the way you intend them to.
None of us have all the time in the world.
Only today.
