Getting the right mortgage rate can save you thousands of dollars, allowing you to become debt free quicker, and financially healthier. That’s how this website will help you.
The information on this page will guide you to learning how to compare rates, pick the right type of mortgage, and even decide which lender to choose.
1. Mortgage Rates 101
How do fixed rate mortgages work?
Fixed rates mortgages allow borrowers to know up front the amount monthly mortgage payments will be for the entire life of the loan. Because the interest rate is fixed, the payment amount will not change and will not be affected by any change in current interest rates.
Additionally, fixed rate mortgages allow borrowers to calculate how long it will take to pay off all outstanding principal and interest. If the property is sold before the end of the loan term, the current balance at that time is what would be required to be paid.
How do variable mortgage rates work?
Variable rate loans differ from fixed because the interest rate and monthly payments vary during the loan term. The interest rates in a variable rate mortgage are related to the base lending rates offered by the central banks or stock and bond indexes at that particular time.
When the base rate changes, so does the interest rate of a variable mortgage. The change in rate can result in significant changes in the monthly payment amount. Variable rate mortgages are also referred to as adjustable rate or ARM mortgages.
What are the different mortgage rate timelines?
The length of the loan term is a crucial element of your home mortgage. The loan term will determine the amount of the monthly payments, how long you will have to pay off the loan, and the total amount that will have been paid at the end of the term. The term length will depend on your personal financial goal, qualifications and vary in length from 1 year to 30 or even 40 years.
Short mortgage loan lengths typically result in higher monthly payments. The trade off for the higher payment is that the amount of interest paid will be less. Shorter term loans have lower interest rates because there is less risk to the lender because the amount of time the bank needs to lend the money is reduced.
Loans with longer lengths are more common, with a 30 year loan being the traditional loan length in America. A 30 year mortgage will result in lower payments but more interest will be paid over the life of the loan.
The downside of a 30 year mortgage is equity takes a while to build because of the front-loaded interest; for many years, a majority of the payment will be allocated toward interest rather than principle.
The upside is the annual interest paid on a home loan may be deducted from your Federal income tax, thus lowering your tax liability.
2. The Mortgage Process 101
What are the different types of lenders?
There are three primary lender categories; mortgage bankers, mortgage brokers and wholesale lenders. Mortgage bankers are lenders who originate loans as well as create bundles of loans which can be sold to Fannie Mae, Freddie Mac and other investors.
Mortgage brokers also originate loans but with the intention of brokering them to various wholesale lending institutions; where underwriting and funding take place. Many mortgage brokers also consider themselves to be correspondents and also claim the title of mortgage bankers.
Many mortgage bankers act as wholesale lenders as well, and they rely on mortgage brokers for the origination of loans. Wholesale lenders offer loans to brokers at costs lower than those retail branches can offer the general public. The mortgage broker will add on their fee for the origination; this cost is passed on to the borrower.
How do home mortgages work?
A mortgage is a loan in which the home purchased serves as collateral. In effect, the mortgage lender loans a specific amount of money with interest for a set period of time. If the loan is not repaid as agreed, the lender can rescind the loan contract and take the home through the foreclosure process.
Mortgage loans are often needed to purchase a home because very few people have enough money to make a one lump sum purchase for property.
Prior to the 1930s, bank loans to purchase a home were unheard of.
How do commercial mortgages work?
A commercial mortgage loan is when business real estate is used as collateral to secure repayment. A commercial mortgage differs from a traditional residential mortgage because the loans are taken on by businesses, rather than individual borrowers.
There is a requirement that the borrower fall under the business structure of either a partnership, business incorporation or a limited liability corporation. The credit evaluation involved related to the business commercial mortgage can be more complicated than a residential mortgage.
3. The “Real” Mortgage Rate
The amount of money in circulation affects the inflation rate. Money is released into the economy when central banks issue loans, notes and when the treasury prints additional money. When banks have cut back on lending and the Federal Reserve is selling U.S. bonds, the money supply contracts and results in inflation.
The selling of interest rates is vital to the expansion of the money supply. When the inflation rate is low and unemployment is high, the result will be a decrease in lending. When interest rates are lowered, prospective buyers enter the market to take advantage of the interest rate reduction and apply for loans.
In this same way, the real mortgage rate is the official mortgage adjusted for inflation. For example, if inflation is 3%, and mortgage rates are 4%, the real mortgage rate is only 1%.