What are the factors affecting mortgage rates?

When it comes time to buy a new house, you know that you need to get your credit in shape to get the lowest possible rate. You know that paying off debt and coming up with a big down payment. can lead to a better rate. However, these aren’t the only factors influencing your mortgage interest rate.

This article explains how the state of the economy influences mortgage interest rates.

1.  Credit Scores

Your credit score directly impacts the interest rate offered on your mortgage. If your credit score is between 760 and 850, you can expect to receive the best interest rate offers when shopping for a home loan. If your credit score is below 620, you are considered a “subprime” borrower and offered significantly higher mortgage interest rates than potential borrowers with better credit ratings. If your credit score has dipped below 500, then you’re unlikely to qualify for a mortgage at all.

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  1. Economic Growth

High levels of economic growth generate higher incomes, more investment and increased consumer spending. The expectations of economic stability drive prospective homeowners into the mortgage market. The increased demand for mortgages generates upward pressure on rates in reaction to the limited supply of loan able funds. The opposite is true during periods of slower economic growth in which spending, investment and income decrease, drawing potential homeowners away from the mortgage market. Consequently, the decrease in demand for mortgage borrowing places downward pressure on mortgage rates.

  1. Risk-based pricing.

Risk is one of the primary factors that affect your mortgage rate. Banking and lending are risky businesses, because there’s always a chance the borrower will fail to repay his or her debt obligation down the road. This is referred to as “default.”

Riskier borrowers are charged higher interest rates than less risky borrowers. Learn more about riskbased pricing. This is one of the primary factors that will influence your mortgage rate.

  1. The type of home you’re buying.

Different types of properties have different risk levels associated with them, based on the historical likelihood of default. So, by extension, the type of property you are buying can also affect your mortgage rate.

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Generally speaking, single-family homes that are purchased as a primary residence pose the lowest risk of default. Properties purchased as vacation or second homes tend to have a higher default rate. Lenders often charge higher rates for “riskier” properties, not to mention imposing stricter underwriting guidelines.

 

  1. The Federal Reserve

The Federal Reserve and other government agencies are at least partially responsible for mortgage interest rates, according to the “U.S. News and World Report.” When the Federal Reserve purchases long-term U.S. Treasury “securities” or debts to help the economy, sometimes mortgage interest rates decline. For example, despite the global economic crisis that was active as of 2010, the best available long-term mortgage interest rates were at a nearly record low of approximately 4.5 percent.

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Taking control of mortgage rate factors

If you’re a control freak, the list of factors above may look daunting. That’s because you can only control a few of them!

The good news is that the variables you can control have the most impact on your rate. They are:

  • Property type — if deciding between two homes, incorporate the relative cost of financing when comparing them
  • Loan-to-value (LTV) — putting more money down improves your chances of loan approval, cuts your loan fees and gets you a lower mortgage insurance rate (if applicable)
  • Credit score — it may be worth it to put off buying a home and concentrating on raising your FICO
  • Loan features — choosing a loan with a shorter fixed-rate period, or one with a 15-year amortisation instead of a 30-year term can save you a lot in interest
  • Points — you can buy a lower interest rate by paying more upfront, and sometimes this is a good strategy
  • Loan amount — it might be smarter to get a conforming first mortgage with a purchase-money second mortgage than taking out a more-expensive jumbo home loan

How rising interest rates affects your mortgage rate?

How will it affect me?

The direct impact on most people is minimal. Most people with large mortgages are on fixed rates, so the increase has zero impact. The proportion of borrowers with variable mortgages – which move up and down in price as the base rate changes – has fallen to only 35% compared with 70% in 2001.

ere are some tips to help keep your mortgage on track and what to do if you find yourself struggling to make your repayments.

  • Negotiate a better mortgage interest rate
  • Consider switching lenders
  • Think about fixing your interest rate
  • Increase your mortgage payments
  • Get help if you’re struggling with your mortgage

I have a variable rate mortgage. How much more will it cost?

If you are on a tracker mortgage that matches any rise in the base rate, then an extra 0.25% adds £12 a month to a £100,000 repayment mortgage and £25 on a £200,000 loan. For the 400,000 households on Nationwide’s base mortgage rate, their monthly bill will rise from £449 to £461 (on a loan size of £100,000) and from £897 to £922 on a £200,000 loan.

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The Fed influences prices

The Fed’s actions have an indirect impact on the prices you pay at the grocery store, gas pump and other retail outlets.

That’s because the cost and availability of money affect people’s willingness to pay for goods and services. When money is cheap and plentiful, there’s more demand and prices tend to rise.

“When the economy’s doing really well and the labour market is good and the unemployment rate is falling, that’s when you have concerns about employers hiring and bidding up wages and inflation rising,” says Gus Gaucher, chief economist with The PNC Financial Services Group.

See what other lenders are offering

See what loans are available from other lenders. A comparison website will give you an idea of the lowest interest rates on offer, but usually won’t cover all products available in the market. You may need to do your own research to find out more.

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Work out what features of your current loan you want to keep, and compare the interest rates on similar loans. For example, does your loan have an offset account or redraw facility? If you find a cheaper loan elsewhere that has the features you need, call your current lender and ask them to match their competitor’s rate.

Use the mortgage calculator to find out how much your repayments could be with different interest rates.

Should I fix my mortgage for the long term to beat future rate rises?

One of the striking new developments in the mortgage market is the sudden availability of 10-year fixes at interest rates that are only marginally above the two- or five-year fixes taken out by most households. HSBC, for example, is allowing borrowers to lock in for 10 years at only 2.49% and Coventry building society at only 2.39%. Given the rising interest rate environment, longer-term fixes are likely to be much more popular this year.

Will the value of the pound rise and give me more holiday money?

Sadly not. Even though the rate rise has been widely anticipated, sterling remains stuck at around €1.12, marginally down on this time last summer. Unless there is a breakthrough on the Br exit negotiations, expect the pound to remain under pressure.Image result for mortgage

What is a zombie mortgage?

A zombie mortgage property is one that has usually been abandoned by the owner, but not yet foreclosed upon by the lender. Sometimes years pass with no activity.  The property might be overgrown and truly abandoned, or a property management company might be cutting the grass and periodically posting notices with contact information.

Properties that seem to be abandoned usually have one of four explanations:

  • The lender decided it was not worth the trouble to foreclose. Every lender has its own “secret numbers.” For lender ABC, they might not foreclose on anything with an appraised value less than $20,000.  For lender XYZ, it might be $35,000.
  • The property has dangerous “warts” and the lender does not want to foreclose. It could be reports of meth production or toxic waste. It could be a liability issue with a collapsed vinyl lined pool. It could be a casualty loss for which the lender received some insurance proceeds, and now the property is a ruined hulk not worth rehabbing, at least for the lender.
  • The mortgage loan (called an “asset” by the lender) slipped between the cracks.  The bank does not know it owns that asset.
  • The loan is owned by a local or regional lender that will think about it later, because they are too busy with larger loans and high value properties.Image result for What is a zombie mortgage?

Bankruptcy and Zombie Mortgages

  • In bankruptcy this problem can be particularly troublesome.  Oftentimes a debtor will elect to surrender real property thereby eliminating the personal liability to the lender.  This option is allowed by the bankruptcy code and is designed to afford a fresh start.  However, if the bank does not foreclose, the debtor become responsible for all the post-bankruptcy associated costs of home-ownership thereby impeding the fresh start provided by the bankruptcy code.
  • In bankruptcy there is a small, but growing, body of case law which allows debtors and trustees to force the sale of such properties.  Practically speaking however such measures will require action above and beyond the standard bankruptcy and almost certainly require an adversary proceeding or a contested matter – something beyond the means of most debtors.
  • If the benefits outweigh the costs debtor can proceed ahead with bankruptcy litigation to force the sale.  Usually courts will look to Section 363 of the Bankruptcy Code for authority to permit sales under such circumstances.  Sometimes a court will use its equitable powers under Section 105.  However, the former faces very divergent approaches depending on jurisdiction and the latter requires asking a court to do something it might not be comfortable undertaking.  As of the writing of this document there don’t appear to be any relevant opinions within the Colorado bankruptcy courts.
  • As real estate markets improve then this issue becomes less of a problem.  Some local jurisdictions are attempting to implement laws designed to remedy this problem.  However, they face challenges in that such laws will conflict with long established legal principals in addition to the likelihood that places additional legal burdens would increase the cost of lending for everyone else.

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What will it take to fight zombie mortgages?

The walking dead haunts the land of real estate finance. A “zombie mortgage” is an abandoned property with a mortgage during foreclosure. The house sits in limbo, at best continuing to deteriorate because of lack of repairs; at worst, vandalised, trashed, used for illegal activities, and being a drag on the neighbourhood.

Recognising the potential negative impact of these foreclosures, some states have tried to fight the zombies by expediting the foreclosure process for vacant properties and requiring mortgage services to maintain these properties. This is part of a bigger conversation on the costs of long foreclosure timelines versus the benefits of more borrower-friendly foreclosure processes. To have this conversation, policymakers must reduce the emotion in this discussion and carefully balance the economic and other interests of borrowers, communities, mortgage services, states, and municipalities.Image result for What will it take to fight zombie mortgages?

 

 

Is Mortgage Life Insurance Worth It?

Mortgage protection life insurance–wait. what?

With so many different types of insurance you can purchase nowadays, it’s very easy to get insurance poor.Buying coverage on your home with mortgage life insurance teeters on the fence of being a bit too much.

Is Mortgage Life Insurance Worth It?

Before I get ahead of myself, let’s look exactly what mortgage life insurance really is, then we’ll look to see if it’s worth buying.  Finally, we’ll look at what other alternatives you can consider instead– such as buying a term life insurance policy.

What Mortgage Protection Life Insurance Is Not

First, I wanted to clarify what mortgage life insurance is not. Don’t get this confused with PMI (Private Mortgage Life Insurance).  PMI is what is required by your bank or lender if you can’t make a down payment (typically 20%) when purchasing or building new home.  I know in our case of the home we’re building, are bank is requiring the 20% to avoid the PMI insurance.

 

What is mortgage protection insurance?

Mortgage protection insurance, or MPI (sometimes called mortgage payment protection insurance), is simply a form of life insurance. The cost depends on factors such as the amount of your mortgage, your age and your health. For MPI policies that cover a mortgage in the event of disability, costs also vary depending on your occupation.

Shortly after you close on a mortgage – whether it’s because you just bought a home or refinanced your existing loan – you’ll probably start getting daily solicitations in the mail urging you to purchase mortgage protection life insurance. Don’t confuse this product with the private mortgage insurance or mortgage insurance premium you may need to pay for along with your mortgage if you put down less than 20% on your home. And do understand what you would be buying if you choose to sign up for mortgage protection life insurance.

These solicitations disguise themselves as official requests from your mortgage lender and give details about your mortgage, like your lender’s name, how much you borrowed, your loan type and, of course, your name and address. In stern, bold lettering, they lead with statements like these:

  • “IMPORTANT NOTICE: PLEASE COMPLETE AND RETURN”
  • “FINAL NOTICE: MORTGAGE PROTECTION CARD”
  • “NOTICE OF OFFERING: MORTGAGE FREE HOME PROTECTION”

Then they get into the scare tactics and emotional pleas:

“What if you die suddenly? Would your family be able to continue paying the mortgage and maintain the same quality of life?”

The solution they offer is a program claiming to “protect your family in case of an unexpected tragedy by paying off your mortgage.” It’s called a mortgage protection program or mortgage protection life insurance. “Without this plan,” the solicitations say, “your family would still have to make your monthly mortgage payments.”

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Choosing and saving on MPI

If you have health or job risks that make life or disability insurance unavailable or too expensive, mortgage protection insurance is probably a smart option. But don’t sign up through your mortgage company without shopping around.

“Ask about the price and features of each policy and whether it can be converted into whole life insurance,” says Ketch am. “Also investigate the insurer’s financial condition through A.M. Best Co., which rates insurers.”

If you’re considering MPI payable upon your death, you might buy a level life insurance instead. Your policy wouldn’t decline in value and would cover not only your mortgage but also your family’s living and educational expenses in the absence of your income.

“You’re far better off using a level product because most insurance carriers allow a later reduction in the policy’s face value,” Holman says. “If at, say, year seven in your policy, you decide your need isn’t $1 million but only $800,000, you can reduce the face amount and save through the reduced premium. You’re better off controlling the benefit than having it automatically reduced.”

 

What is a better solution?

We do agree that buying insurance that can be used to pay off your mortgage is important, but it needs to be purchased from an insurance company, not a lender. With a life insurance policy there are several benefits over a mortgage life insurance policy from a lender. To find out more about what the benefits are of having a personal life insurance policy that can be used against your mortgage, contact our life and financial services team.

Mortgage pre-approval: what is it and how does it work?

Shopping idly for a home may be pleasant, but serious home buyers need to start the process in a lender’s office, not at an open house. As a potential buyer you benefit in several ways by consulting with a lender and obtaining an approval letter.

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First, you have an opportunity to discuss loan options and budgeting with the lender. Second, the lender will check your credit and alert you to any problems. Third, you will learn the maximum amount you can borrow, which will give you an idea of your price range. However, you should be careful to estimate your comfort level with a given house payment rather than immediately aiming for the top of your spending limit. Lastly, most home sellers expect buyers to have a pre-approval letter and will be more willing to negotiate with you if you have proof that you can obtain financing.

Pre-Qualification or Pre-Approval?

You’ve likely heard the term “pre-qualification” used interchangeably with pre-approval, but they are not one and the same. With a pre-qualification, you provide an overview of your finances, income and debts to a mortgage lender who then gives you an estimated loan amount. However, the lender doesn’t pull your credit reports or verify your financial information. Accordingly, pre-qualification is a helpful starting point to determine what you can afford but carries no weight when you make offers.

On the other hand, a pre-approval involves filling out a mortgage application and providing your Social Security number, so a lender can do a hard credit check. A hard credit check is triggered when you apply for a mortgage and a lender pulls your credit report and credit score to assess your creditworthiness before deciding to lend you money. These checks are recorded on your credit report and can impact your credit score. On the other hand, a soft credit check is when you pull your credit yourself, or when a credit card company or lender pre-approves you for an offer without you asking.

Also, you’ll list all your bank account information, assets, debts, income and employment history, past addresses, and other key details for a lender to verify. Why? Above all, a lender wants to ensure you can repay your loan. Lenders also use the provided information to calculate your debt-to-income and loan-to-value ratios, which are important factors in determining interest rate and ideal loan type. 

Benefits

Being pre-approved for a mortgage by a mortgage banker or broker can be a good negotiating tool. For one, a seller might be inclined to accept a slightly lower offer if it comes backed by a solid pre-approval. This is especially important when a competing offer comes from a buyer who hasn’t yet applied for a mortgage. THe process of obtaining a pre-approval prior to making a home search also gives a buyer a realistic idea of what she can afford.

 Considerations

The first step in the process of obtaining a mortgage pre-approval is to apply to a lender or a mortgage broker. The buyer should have an idea of the size of the loan being contemplated, and the lender or the broker will work with the applicant to determine just how much home he can afford. Prospective buyers should always try to avoid the temptation to stretch a contemplated payment too far, thereby taking on more loan than can easily be afforded.

The pre-approval processes

The pre-approval process can start anywhere up to 120 days before you want to buy a home, depending on how long the lender’s pre-approval is guaranteed. It’s the first step to getting a mortgage, and although it typically doesn’t take that long to complete, another benefit to doing it early in the process is that you’re not simultaneously dealing with offer negotiations, when every moment can be crucial. For a mortgage pre-approval, you must provide supplemental documentations proving your income, the source of your down payment, and your assets and liabilities. The lender will also look at your credit report to determine your credit-worthiness.

According to BMO, you (and other applicants, if more than one person is applying) will need to provide the following information:

  • Photo ID
  • A record of employment income such as a pay stub, T-4 slip or a personal income tax return (if you are self-employed, at least two years of Personal Income Tax Returns and Financial Statements)
  • A letter from your employer stating the length of employment and current salary
  • The account numbers and locations of your bank accounts and investments
  • Proof of assets, such as
    • Vehicles
    • Boats
    • Investments and interest income
    • Retirement savings accounts
    • Collections
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    • Other real estate holdings
  • Proof of liabilities, such as
    • Existing mortgages
    • Credit card balances
    • Car loans
    • Student loans
    • Lines of credit
    • Co-signed or guaranteed loans
    • Liens
    • Child support