I know these things are complicated and there are several different types of mortages and considerations. I’ve never bought property before and hope to buy my first place in 12 months. In order to do some basic research, how can I calculate what a mortgage might be? A friend told me something like for every $100k in the loan, you can expect your mortgage to be $xxx. I forget what xxx equals.
The first two considerations you have when arranging a mortgage are what type of mortgage rate is required along with how the mortgage will be repaid. The following article looks at the different mortgage rate options such as fixed rates, discounted rates, capped, variable and tracker rates, along with the main advantages and disadvantages for each option.
When considering which type of mortgage product is suitable for your needs, it pays to consider your attitude to risk, as those with a cautious attitude to risk may find a fixed or capped rate more appropriate, whereas those with a more adventurous attitude to risk may find a tracker rate that fluctuates up and down more appealing.
Following is a description of the different mortgage rate options along with a summary of the main advantages and disadvantages for each option.
Fixed Rate Mortgages
With a fixed rate mortgage you can lock into a fixed repayment cost that will not fluctuate up or down with movements in the Bank of England base rate, or the lenders Standard Variable Rate. The most popular fixed rate mortgages are 2, 3 and 5 year fixed rates, but fixed rates of between 10 years and 30 years are now more common at reasonable rates. As a general rule of thumb, the longer the fixed rate period the higher the interest rate. This is also applicable when considering the percentage loan to value, where borrowing below 75% of the property value will attract a lower fixed rate in comparison to an 85% or 90% loan to value which will attract a higher fixed rate percentage.
Advantages
Having the peace of mind that your mortgage payment will not rise with increases in the base rate. This makes budgeting easier for the fixed rate period selected, and can be advantageous to first time buyers or those stretching themselves to the maximum affordable payment.
Disadvantages
The monthly repayment will remain the same even when the economic environment sees the Bank of England and lenders reducing their base rates. In these circumstances where the fixed rate ends up costing more, remembering why the initial decision was made to select a fixed rate, can be helpful.
Discount Rate Mortgages
With a discount rate mortgage, you are offered a percentage off of the lenders Standard Variable Rate (SVR). This takes the form of a reduction in the normal variable interest rate by say, 1.5% for a year or two. The common mistake of those considering a discount rate, is to assume the higher the percentage discount offered, the better the deal. The key bit of information missing however, is what the lenders SVR is, as this will dictate the actual pay rate after the discount is applied.
As with a fixed rate, the longer the discount rate period the smaller the discount offered, and the higher the rate. Shorter periods such as 2 years will attract the highest levels of discount. In addition when considering the amount to be borrowed, the increased risk to the lender of providing a 90% loan will be reflected in the pay rate, with lower borrowing amounts attracting more competitive rates.
Advantages
Should the lender reduce their standard variable rate your interest rate and monthly payment will also reduce.
Disadvantages
When the lender or Bank of England increases their base rate, your mortgage payment will also increase. However in some circumstances lenders do not always pass on the full amount of a Bank of England base rate reduction.
Affordability of the mortgage at the end of the discount rate period should be considered at outset. There are no guarantees that follow on rates will be available, and so you should make certain that you are able to afford the monthly payment at the lenders standard variable applicable upon expiry of the discount rate period. Allowing for an increase in interest rates above the SVR would be prudent to avoid a ‘Payment shock’.
Tracker Rate Mortgages
Tracker rate mortgages guarantee to follow the Bank of England base rate when it moves up or down. Tracker rates are expressed as a percentage above or below the Bank of England base rate such at +0.5% over BOE base rate for 2 years.
The most popular tracker rate mortgages have been 2 and 3 year products, but there is now an increasing demand for lifetime tracker rates as borrowers are starting to realise that the Bank of England base rate has been reasonable competitive, and having a mortgage product linked to it could be beneficial in the long term.
Advantages
A tracker rate guarantees to follow the Bank of England base rate for however long the tracker rate is set up for. This means that as soon as the Bank of England cuts rates, a tracker rate mortgage guarantees to reflect the new lower rate and repayment.
The overall cost calculation of a Lifetime tracker rate can be significantly lower than taking shorter term mortgage products with the ongoing costs of remortgaging such as valuation fees, legal fee and lender arrangement fees. Lifetime tracker rates often have no early repayment penalty restrictions.
Disadvantages
The mortgage payment will go up if the Bank of England increases the base rate. Early repayment charges are likely to be applicable during the benefit period, and as with other types of mortgage rate are likely to be 6 months interest or 3% - 5% of the loan.
Variable Rate Mortgages
Variable rate mortgages are more commonly known as the lenders Standard Variable Rate (SVR), and are the rate that you come onto after the expiry of a fixed, discounted, tracker or capped rate mortgage. A variable rate is similar to a tracker rate in as much as the lender will base their SVR on the Bank of England base rate plus a loading of between say 2.5% and 3.5%. That is where the similarity ends however.
Advantages
The main advantage of being on the lenders Standard Variable Rate (SVR) is that there will be no early repayment charge for redeeming the loan in full. This provides a certain amount of flexibility when there is uncertainty in the market about where rates are moving. For those wishing to fix their mortgage rate, an SVR with no early repayment charge can provide the breathing space required to just wait and see before committing.
Whilst not always the case lenders do tend to pass on reductions in the Bank of England base rate through their SVR, and so those on the SVR will benefit from a reduction in the mortgage payment.
Disadvantages
Generally the SVR will be a higher rate of interest and so your mortgage payment will be greater than if you were on a tracker rate, fixed rate or discounted rate mortgage product. In addition, as has been seen in the past, some lenders do not pass on any or all of a reduction in the Bank of England base rate which results in a higher monthly payment in comparison to other mortgage options.
Capped Rate Mortgages
The capped rate is a variable rate mortgage which has a fixed limit to how far the interest rate can increase (the cap), and provides the option to know the maximum level of mortgage payment from outset. Capped rate mortgages offer the best of both worlds for those with a cautious attitude to risk, but who still wish to benefit from interest rate reductions. For example if the cap is set at 6% and the banks rates go below this rate, then your repayments will go down to reflect the reduction, with the guarantee that should rates go above the 6%, your payments will remain based on the maximum 6% because of the cap.
Advantages
If the Bank of England base rate falls resulting in a fall in the lenders standard variable rate below the level of the capped rate, then your monthly repayment will reduce. For many this provides the peace of mind and certainty for ease of budgeting offered by a know maximum monthly payment.
Disadvantages
Because a capped rate offers the best of both worlds to the borrower, the capped rate is usually uncompetitive as lenders need to price in the risk of rate reductions, leaving those such as first time buyers or those stretching their affordability, exposed to a higher rate than would be available with a fixed rate. This means that UK lenders generally don’t offer capped rate mortgages with any sort of competitive rate, preferring to market fixed rates instead.
Do mortgage companies make money by offering a higher interest rate. For example- one mortgage lender is offering 6.5, and mine is offering 6.75. If they are both equal for service, closing costs, etc., how could one offer a lower rate? Do they stand to make money off of the extra .25%? I tried to negotiate the rate with my current lender, down to 6.5%, but they told me they could not. Are they lying, because they feel they already have me?
But isn’t their rate, based somehow on the fed rate?
The best financial deals are found only after a thorough investigation into home loans and mortgages. Many people dream of owning their own home, but the high cost of homes generally requires a home mortgage to make it a reality. A mortgage is just like any other product; thus whether it is a home purchase, refinancing or a home equity loan, the price and terms of a mortgage can be negotiated. If you decide to apply for a home equity loan, you shouldn’t necessarily automatically go with the same bank that holds your first mortgage. Instead, shop around to find the best rates and loan terms. Finding the right loan is always a challenge; it requires checking different lenders and comparing options to select the home equity loan that best meets your needs!
There are different types of mortgages today to suit different classes of people. To make life easier for the old and the retired, the government has even introduced reverse mortgages. This type of mortgage is a loan against the home that does not have to be paid back as long as the owner is alive and living in the home, and at the same time provides income to the owner.
Until recently, bad credit was something of a mystery. However, after the establishment of the FICO score, a uniform credit scoring agency, measuring people’s credit behavior has become easier. Your future credit behavior can more easily be predicted based on this data. Most lenders use the FICO score as a starting point when deciding whether or not to extend credit to you. Moreover, if you don’t pay your monthly mortgage payments, the mortgage company can foreclose leading you to lose your home and affecting your creditworthiness in the future.
In a rapidly changing economic scenario it is often difficult to keep up with the complexities of the financial world. We at mortgageproguide.com have made every effort to elucidate and enunciate in simple terms, matters related to money and mortgage. Mortgageproguide.com is a comprehensive site offering free and unbiased information on home loans, conventional mortgages, bad credit mortgages, home equity loans and reverse mortgage. So go through to moneyproguide.com in detail and make an informed decision on all matters concerning money and mortgage.
Selecting a Mortgage
Selecting a mortgage is not only time consuming but confusing, given the large variety of loan packages on offer in the market today. With different mortgage rates, varied costs and fees and multiple terms and conditions, you need to be well informed to make the correct decision about which mortgage is best suited for you.
Among other things, mortgage rates are extremely important while selecting a mortgage. Interest rates fluctuate depending on different factors that influence the economy like prime rate, Treasury bill rates, federal fund rate, federal discount rate and certificate of deposit rate etc. If the economy is doing well and the demand for mortgages is high, the interest rates will also see a climb. On the other hand, if the demand for mortgages is low in a poor economy the interest rates will drop as well.
However, there are several other factors that are as or perhaps more important than interest rates that determine which mortgage is right for you. These primarily include your financial situation such as income, savings and liquidity, your housing needs and duration of stay, the level of risk you are willing to take as well as the term of your loan. All these factors need to be considered equally and balanced with one’s present position and future goals.
Before you decided on which mortgage is best for you, you will need a mortgage lender approval who based on your credit rating will offer you a loan that he feels is within your reasonable risk limits. The mortgage lender will take into consideration your ability to pay and then adjust your interest rates, points, terms etc accordingly. Only after this will you be able to select a mortgage that fits your requirements both, personally as well as financially. You can go in for mortgage refinancing at the end of the term if such a need arises.
BASIC FEATURES WHILE SELECTING:
1. Interest rate – fixed or variable:
In a fixed rate mortgage your interest rate will not change during the entire duration of your loan. This will enable you to know exactly what your periodic payout is and how much of the mortgage will be paid off at the end of the term.
• Federal Housing Administration Insured Loans (FHA)
• Veterans Administration Loans (VA)
• Farmers Home Administration Loans (FmHA)
With a variable rate, the interest will vary periodically during the life of the loan, depending on interest rates in financial markets.
2) Duration of mortgage: short term or long term
The duration of mortgage is the length of current mortgage agreement. A mortgage typically has duration of six months to ten years. Usually, if the term of the loan is short, the interest rates will tend to be low. A short term mortgage is for two years or less and is appropriate for people who feel that the interest rates will drop in the future, especially when it is time for renewal. A long term mortgage is for three years or more and most suited for people who believe that current rates are stable and reasonable and want the security of budgeting for the future. After the expiration of the term loan, you can either go for a renewal in mortgage at the current rates or repay the balance principal owing on the mortgage.
3) Open or closed mortgages
Open mortgages are typically short-term loans and can be paid off at any time without penalty. Homeowners who are planning to sell in the near future or require the flexibility to make large, lump-sum payments before maturity choose these kinds of mortgages. Closed mortgages are committed after taking into consideration specific terms. If you want to pay off the mortgage balance you will have to wait until the maturity date or pay a penalty.
4) Conventional or high ratio
A conventional mortgage is one that is not more than 75% of the appraised value of purchase price of the property. The balance amount is paid through your own resources and is known as down payment. If you have to borrow more than the stipulated 75%, then you will need a high ratio mortgage. If the down payment is less than 25%, the mortgage will have to be insured. The insurer will charge a fee which will depend on the amount you are borrowing and the percentage of your down payment. Fees range from 1% to 3.5% of the principal amount and can be paid up front or added to the principal amount of the mortgage.
REVERSE MORTGAGES:
Unlike a traditional mortgage where you make monthly payments to a lender, in a “reverse” mortgage, you receive money from the lender. It is a loan against your home or borrowings on home equity, which you do not have to pay back as long as you live there and yet, retain the title to your home. It must only be repaid once you die, sell your home or permanently move out of there. With a reverse mortgage the value of your home can be turned into cash which you can receive as a lump sum and up front, monthly cash advance, credit line which allows you to withdraw as and when you need it or a combination of all.
Reverse mortgages thus help homeowners who are privileged to own a house but are cash strapped stay in their homes and still meet their financial obligations. Reverse mortgage is for seniors. To be eligible for most reverse mortgages, you must own your home and be 62 years of age or older. The proceeds of a reverse mortgage are generally tax-free, and most have no income restrictions. They also do not affect Social Security or Medicare Benefits.
There are typically three types of reverse mortgages:
• Single purpose reverse mortgage– these are offered by some state and local government agencies and nonprofit organizations and have very low costs. To qualify, one should typically belong to a low or moderate-income group. They are not available everywhere and can only be used for a single purpose as specified by the lender like repairs, improvements, paying property taxes etc.
• Federally-insured reverse mortgages- which are also known as Home Equity Conversion Mortgages (HECMs), and are backed by the U. S. Department of Housing and Urban Development (HUD) and
• Proprietary reverse mortgages- which are private loans that are backed by the companies that develop them.
In both, the HCEMs and proprietary reverse mortgages, the costs are relatively higher, widely available and can be used for any purpose. Additionally, the amount of money you can borrow with these mortgages depends on several factors, including your age, type of reverse mortgage you select, appraised value of your home, current interest rates, and the area where you live. In general, the older you are, the more valuable your home, and the less you owe on it, the more money you can get.
Just like a traditional mortgage, there are several fees and costs associated with reverse mortgages. These charges include an origination fee, up-front mortgage insurance premium (for the FHA Home Equity Conversion Mortgage or HECM), an appraisal fee, and certain other standard closing costs. In most cases, these fees and costs are capped and may be financed as part of the reverse mortgage.
Origination fee
This fee covers a lender’s operating expenses, office overheads and marketing costs for making the reverse mortgage. Home Keeper borrowers are charged an origination fee that may not exceed 2 % of the value of the home.
Mortgage insurance premium
Under the HECM program, borrowers are charged a mortgage insurance premium (MIP), equal to 2% of the maximum claim amount or home value, whichever is less Additionally there is an annual premium thereafter equal to 0.5% of the loan balance. The MIP guarantees that if the company managing your account goes out of business, the government will intervene to ensure that you have continued access to your loan funds. Moreover the MIP guarantees that your debt will never exceed the value of your home at the time of repayment.
Appraisal fee
It is paid to the appraiser who is in charge of appraising your home and assigning it a current market value. Since Federal regulation mandate that the home be free of structural defects, an appraiser will also ensure as much. If the appraiser uncovers property defects, these will have to be repaired through an independent contractor whose costs can be financed in the loan.
Closing Costs
Include other miscellaneous charges such as credit report fees, flood certification fees, escrow or settlement fees, document preparation fees, recording and courier fees, title insurance, pest inspection and survey fees.
Service fee set-aside is an amount deducted from the remaining loan proceeds at closing to cover the projected costs of servicing your account.
The benefits of reverse mortgages are plenty. Reverse mortgage for seniors is a boon and allows the older generation to live with dignity and happiness.
I know there is a law that was passed that stops mortgage companies from forcing home owners to insure their homes to loan value instead of the appraised value. I used to have a copy of that document that I would use when I went up against the mortgage companies, but I can’t find it. Can anyone help?
I live in South Africa (we call this type of business Mortgage Origination) and have been in the business since 1995 and am now running my own business.It is highly competitive.We are always looking for new marketing ideas, if you have any I would love to hear from you.I now specialise in homeloans where the clients have a credit problem.This is quite new here and very successful. We are a mix between a first world and a third world country and look up to our overseas counterparts as you seem to be extremely progressive when it comes to marketing.
Currently I am about to close on a house and have a 30 year fixed rate mortgage. My question is whether paying additional amounts above my normal mortgage payment reduces the amount I will have to pay each month, or whether it just reduces the amount of periods in my loan term.
“Wow!” you say to your spouse as you hit the brakes on the car. “Did you see the mortgage rate those guys are advertising?” Your worries are over, you’re thinking. Just lock in a rate like that for the next ten years, and you’ve got it made.
Not so fast. That rate may not be the one for you. Typically, the lowest available rate - and the one that makes the rate sign look great from the street - will be for a variable or adjustable-rate mortgage. That rate has the potential to be like a roller coaster. The posted variable or adjustable rate is the rate you’re getting today. Unless you have an economic ouija board, you won’t be able to predict what kind of ups and downs are ahead of you.
Let’s take a closer look. A lender will offer different rates for different types of mortgages. The rates are determined based on financial risk -to the institution and to you. When a customer is willing to take on the risk, he/she is rewarded with a lower rate. If the lender is taking on the risk (that is, the customer is promised a particular rate… regardless of what happens in the future), the rate is higher. The longer the term, the higher the risk for the financial institution.
So how do you decide? Fixed-rate mortgages, because they require a low risk tolerance, are usually better suited to first-time buyers or those who haven’t owned a home for a very long period. Ask yourself these questions: Do you like or need to know exactly what your payment is going to be over a longer period of time? Do you want to avoid the need to consistently watch rates? Do you have less than 25% down? If you answered “yes” to all, or most of these questions, a more conservative fixed-rate ontario mortgage could be the better choice for you.
A variable or adjustable-rate mortgage is best suited to people who have a flexible budget and can tolerate higher risk. Ask yourself these questions: Do you watch market conditions? Can you handle any sudden rate increases that could increase your payment? Do you have 25% or more equity in your home? If you answered “yes” to all, or most of these questions, a variable or adjustable-rate mortgage might best suit your needs.
Some lenders offer a special promotional rate for the first few months of a variable-rate mortgage, which you should discuss with your mortgage broker. Also discuss what your rate will be based on - prime minus 0.5% or 0.6% or on Bankers’ Acceptances (BAs) plus 1%. The latter being a new kind of adjustable-rate mortgage that has recently been introduced to the marketplace. Most variables or adjustables allow you to exercise an option to “lock in” a fixed rate at any time for the remaining portion of your mortgage term or for a longer term.
If the uncertainty of a floating rate is going to give you sleepless nights, you’re in good company. Many Canadians prefer the certainty of a fixed-rate mortgage. They know exactly how much they will pay over the term of their mortgage, and they can plan accordingly… with no financial surprises. But if rates do drop… and drop… and drop… you are committed to the “promise” that you have made. Your best option - have a mortgage broker help you decide which option best meets your needs.
I funded a private mortgage loan for two individuals. Can I report this loan to the credit bureaus so it will be included in their credit score?
We are in the process of trying to refinance with a new mortgage company. We currently have homeowner’s insurance through Farm Bureau Insurance, as well as boat, automobile, and life insurance. The mortgage company we are refinancing with is saying that we must have and escrow account and pay their OWN homeowner’s insurance, instead of Farm Bureau. I don’t want to do this because we get a multi-line discount at Farm Bureau, and I like them. Can they do this?
