19
May
By support
Home Mortgage Tips

How Are Mortgage Rates Determined?

How Are Mortgage Rates Determined?If you’ve been paying attention to the mortgage rate news, you may be wondering exactly how it is banks decide what mortgage rates to offer. Do they just pick a number at random? Mortgage rates may seem somewhat arbitrary, but there’s actually something of a science to them.

So how does your bank or lender determine what your interest rate will be? Here are just some of the factors that go into the equation.

Rates Always Account For Inflation

First and foremost, every mortgage interest rate needs to account for inflation. Inflation is the average annual change in purchasing power brought about by changing economic conditions. When inflation goes up, money loses purchasing power and when it goes down, money gains purchasing power.

For example, an annual inflation rate of two percent means that a $100 bill minted in 2014 would be able to buy just $98 worth of goods in 2015. Mortgage interest rates always take the inflation rate into account, because if your bank’s mortgage rate were lower than the rate of inflation, your bank would actually lose money on your mortgage.

The Default Risk Premium: Your Likelihood Of Default Impacts Your Rate

The default risk premium is a rate that your lender adds to the inflation rate in order to mitigate the risk of not recovering the loan. Different kinds of loans carry different risk levels, and your lender needs some way of staying profitable even when losses happen. The default risk premium helps your lender to profit more on high-risk mortgages, which mitigates the problems associated with a default.

The more at risk of defaulting on a loan you are, the higher this premium will be.

The Liquidity Premium: Can Your Lender Recoup Potential Losses?

The liquidity premium is similar to the default risk premium, but rather than addressing the possibility that the borrower might default, this premium mitigates the risk of not being able to re-sell the property after the borrower defaults. If a borrower enters default, the lender’s only option is to sell the property in order to recover its losses. However, a home is a non-liquid asset, and it’s very difficult to turn a home into cash and the liquidity premium compensates the lender for the additional time and effort it takes to sell a non-liquid asset.

Mortgage rates may seem like sorcery, but there’s a clear science and a logical method involved in calculating rates and premiums. To learn more about mortgage rates, or to find out what kind of a mortgage rate you may be eligible for, contact your trusted local mortgage professional.

12
May
By support
Home Mortgage Tips

5 Uncommon Mortgage Terms You Need to Know

5 Uncommon Mortgage Terms You Need to KnowWhen it comes to finding a new home, there are lots of complex ratios, terms, and contracts that you’ll encounter – and at times, it’ll feel like you’re trying to navigate a minefield. Here are five mortgage terms you may not encounter regularly that you’ll need to know when buying a home.

Escrow: Money Held In Trust To Pay Taxes

An escrow account is a bank account that your lender maintains on your behalf. When you close your mortgage, you’ll need to deposit a certain percent of your annual property taxes into the escrow account, which your lender will hold in trust and use to pay your property taxes.

PITI: How Your Lender Calculates Your Monthly Payments

Your lender uses a specific formula used to calculate exactly how much money you need to pay your lender each month. Each month, your mortgage payment will include portions that go toward your principal loan amount (P), your interest payment (I), your property taxes (T), and your homeowner’s insurance (I). If you have private mortgage insurance, it’ll be included with this PITI payment.

Rate Buydown: Lowering Your Interest Rate With A Larger Down Payment

A rate buydown, also known as a discount point, is a chunk of your mortgage interest that you pre-pay in order to get a lower monthly interest rate over the life of the loan. Each point you buy reduces your interest rate by a small amount.

Loan Estimate: What Your Lender Must, By Law, Give You

A loan estimate is a form that your lender is required to give you when you apply for a mortgage, as per the Truth in Lending Act. Your loan estimate will include your estimated costs of carrying the loan – including monthly payments, interest rates, and processing fees. Loan estimates allow you to compare terms and rates across different lenders.

Loan-To-Value: Determining How Much House You Can Afford

Your LTV (loan-to-value) ratio is a ratio that is used to calculate the amount of equity you have in your home and to assess your risk as a borrower. Typically expressed as a percentage, your LTV is determined by dividing the total amount of your mortgage loan by the property’s fair market value. Borrowers generally prefer to see lower LTV ratios.

Mortgages contain a variety of legal terms that can be challenging for the uninitiated to understand. But with a qualified mortgage advisor on your side, you’ll have no difficulty navigating mortgage contracts and finding the right mortgage for you. Contact your local mortgage professional to learn more.

11
May
By support
Home Mortgage Tips

How to Smartly Leverage Your Home Equity

How to Smartly Leverage Your Home EquitySo you’ve been a homeowner for some time. You’ve been faithfully paying off your mortgage for years, and you have a fair bit of equity built up in your home – and that makes you proud. But now, you’re wondering what good equity is if you’re not using it.

How do you actually use home equity? And how do you leverage it to get a high return for low risk? Here are just a few options you may want to consider if you’re looking for something to do with your equity.

Use A Home Equity Loan Or HELOC To Pay Off High-Interest Debt

If you have a certain amount of money invested in your home, you can borrow against that investment by taking out a home equity loan or a Home Equity Line of Credit (HELOC). A home equity loan is ideal for borrowing a large amount of money for a specific purpose, whereas a HELOC works much the same way a credit card does – you can use credit as needed, then pay back what you owe. And if you have a lot of high-interest debt, one of these vehicles could be a great way to pay off your creditors – while it may seem like borrowing from Peter to pay Paul, you actually save thousands of dollars in interest rates by paying off high-interest debt using a lower-interest HELOC or home equity loan.

Buy An Investment Property With A Home Equity Loan

If you’ve been looking to enter the real estate investment market but haven’t had the liquid funds for a deposit, leveraging your home equity in the form of a loan can get you into the landlord game quickly and easily. This is a smart move because while you are taking on more debt, you’re doing so in order to create a new income stream. Ideally, you’ll want to buy a duplex or a home with a granny suite so that you can maximize your investment by renting out more than one dwelling space.

Downsize To A Smaller House And Invest The Difference

Perhaps you’re living in a large house that has seen its value appreciate in recent years, and you’re looking to move in the near future. Selling your large home and moving into a smaller, less expensive home is a great way to simply turn your home’s equity into cash – cash that you can invest.

Leveraging your home equity can be a smart move if it’s done with a larger goal and a solid strategy in mind. But when done irresponsibly, taking equity out of your home can have severe consequences. Talk to your local mortgage professional today to learn more about smart options for leveraging home equity.