Practical and Helpful Tips: Mortgages
Mortgages and Mortgage Rates
Mortgage is basically the amount of loan used to finance a home and which consists of components such as collateral, principal, interest, taxes and insurance. These components are defined as – the collateral of the mortgage is the house itself, the principal refers to the original amount of the loan, taxes and insurance are part computation and requirement in applying for a mortgage and are computed according to the location of the home and the interest charged is known as the mortgage rate.
Mortgage rates are determined by the lender in many benchmark rates, such that rates can be fixed staying for the term of the mortgage or variable fluctuating with the interest rates taken in the market or in the bank. Generally, mortgage rates are more variable than remaining fixed as it rises and falls with interest rates in the market.
The most influencing indicator for the rise and fall of mortgage rates is the 10-year Treasury bond yield, such that any indication for the yield to rise and drop, so, too, with mortgage rates, respectively. Basically, mortgages are calculated for a 30-year time frame, but most of mortgages are already paid after 10 years or refinanced for a new interest rate. Therefore, the 10-year Treasury bond yield becomes a standard benchmark. In addition, the current state of economy can also be a good indicator, such that if the economy is poor, most investors secure bonds to protect their money and if this happens, the bond yield drops. Therefore, a bad economy results into a drop of the bond yield, consequently, affecting the mortgage rates to drop, which in turn attracts more borrowers. On the other hand, if the economy is booming, investors seek for investment opportunities resulting into a rise of the bond yield and allowing mortgage rates to increase.
A lender will always be confronted with a certain degree of risk when he/she issues a mortgage since there is the possibility that the client may default on his/her loan. With a risk of a default possibility, the higher the risk factor will effect into a higher mortgage rate, in which case, this will help ensure the lender to recover the principal amount in a faster period, thereby protecting the lender’s investment. When a borrower has a good financial history, he/she has the capacity to repay his/her debts and this situation can be considered also as a factor to determine the mortgage rate. For as long as the borrower maintains a good credit score, the lender can give a low mortgage rate since the risk of default is low. With the above indicators and determining factors, borrowers must look for the lowest mortgage rates.
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