Interest Rate
The rate charged the borrower each period for the loan of money, by custom quoted on an annual basis. A mortgage interest rate is a rate on a loan secured by a specific property. Calculating the Interest Due from the Interest Rate: The interest rate is used to calculate the interest payment the borrower owes the lender. Since the interest payment is calculated monthly, the rate must be divided by 12 before it is used to calculate the payment. Interest Rate Versus Total Interest Payments as Cost Measures: Some loan officers encourage borrowers to view total interest payments, rather than the interest rate, as the measure of cost they seek to minimize. This is a mistake. The lower the interest rate a borrower pays, the better off they are. Interest payments, in contrast, depend not only on the rate but also on the loan amount and the maturity. Some borrowers bamboozled by this argument pay a higher interest rate or fees for a biweekly mortgage that cuts their interest payments. But the lower interest payments on a biweekly are due to a shortening of the term, which results from making an extra monthly payment every year. Quoted Rates Versus Actual Rates: Not everybody can borrow at the rates quoted in the media, which are based on numerous favorable assumptions: that the applicant's credit is good, they have enough income to qualify, they can fully document their income and assets, they will occupy the house as their primary residence, and on and on. If a particular applicant doesn't meet all the assumptions, his or her rate will be higher. Determinants of Mortgage Rates: A major determinant of all interest rates is inflation. Rates paid by prime borrowers on 30-year FRMs reached 15% in 1981 when the inflation rate was unusually high (for the U.S.). In 2003, the rate was generally below 6% because the inflation rate was very low. A second factor that affects mortgage rates is the efficiency of the housing finance system. In most respects, the U.S. system is more efficient than those in most other countries. As a result, mortgage rates to prime borrowers in the U.S. are only 1%-1.5% above long-term government bond yields. In many other countries, the spread is twice as large or more. Predicting Mortgage Rates: The general level of interest rates is not predictable, but specific interest rates that lag the general market may be. Before the development of secondary mortgage markets, mortgage rates had some degree of predictability because they lagged bond yields by anywhere from two to eight months. Today, however, the mortgage market is thoroughly integrated into the broader capital market. A large proportion of all mortgages are placed in pools against which mortgage-backed securities (MBSs) are issued. MBSs trade actively in the market and are considered close substitutes for bonds. This means that MBS yields and bond yields change together. Since lenders base their rates to borrowers on MBS yields, there is no longer a leading indicator of mortgage rates.
Popular Mortgage Terms
Same as term Mortgage Company: A mortgage lender that sells all the loans it originates in the secondary market. ...
You’ve certainly heard a lot about Credit Score and might even have a general idea about its meaning, but if you came to this page you still have some doubts about what is a credit ...
Same as term Lead Generation Site: A mortgage Web site designed to provide leads to lenders. A 'lead' is a packet of information about a consumer in the market for a loan. Lenders pay ...
A revers mortgage program administered by Fannie Mae. ...
The lowest interest rate possible under an ARM contract. Floors are less common than ceilings. ...
Protection for a borrower against the danger that rates will rise between the time the borrower applies for a loan and the time the loan closes. Rate protection can take the form of a ...
The period used to calculate the monthly mortgage payment. The term is usually but not always the same as the maturity, which is the period over which the loan balance must be paid in ...
A mortgage lender or mortgage broker. ...
The process of determining whether a prospective borrower has the ability to repay a loan. Qualification Versus Approval: To be approved for a loan, a prospective borrower must ...
Have a question or comment?
We're here to help.