One of the most common things that borrowers ask lenders is what their rates will be. The rates a lender has is very volatile, it is not always the same. So the lender will always have to wait via fax, E-mail or a secure website for the rate sheet that comes from their company. Because it is volatile the rates could even change 5 times in one day. As a borrower you have no right to see the rate sheet, this is basically the advantage or a way for the lenders to do the business. The rate sheet will always show the interest rates and the cost expressed in points. A point is equal to one percent of the loan.
The cost of the rate usually vary depending on the interest rates, higher rates are cheaper compared to lower rates. This is done because it helps the lender to earn more over the interest for the period of the loan, so lenders charge less cost. When customers want a lower interest rate, they are charged with higher cost because lenders will earn fewer in the longer period of the loan.
The point system would usually work in this way: Zero points mean par value or pricing. The numbers in parenthesis means premium or rebate. Premium or rebate means that the money is paid back to the loan officer or where the loan originated at a rate instead of having a cost.
The loan officers are paid by commission. The earnings of the loan officer and the branch are split between them. The fees that are not subject to the points are not split up and instead directly go to the branch.
Before giving you his quotation price, the lender will add on the profit he and his branch would like to make. Dont worry however as there limits are set by the company as how high or much he or she can add to his cost. For the lender, he or she should not worry about the limitations because between the minimum and maximum there is a great deal of flexibility.
An example of this situation is when the loan officer wants to earn 1 point. When he gives you the quotation, it will already include the one point to the cost of the loan. So if the lender has 7.125% of interest rate, the lender will earn 1 point and have some left over money. The left over money is then used to pay the processing fees and the documents.
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Recently we have witnessed a boom in the mortgage industry. With increasing real estate values and a very low inflation, interest rates have touched an all time low. Since inflation is running extremely low at present, economists feel that mortgage rates will remain low in the near future also. As an obvious consequence homeowners are giving serious thoughts to the effects of low mortgage rate.
Usually, mortgage lenders offer a variety of combinations of interest rates and points. For example, 6.0% and 2 points, 6.5% and 1 point or 7.0% and no points. Points are a one-time upfront payment that the borrower makes to the lender at the time of closing the mortgage. It is a fee like the interest and not a part of the down payment. A drop in mortgage interest rates reduces the cost of borrowing and should logically result in an increase in prices in a market where most people borrow money to purchase a home (for instance, in the United States), so that average payments remain constant.
One of the direct effects of low mortgage rate is that the homeowners opt for greater savings through refinancing. Hence the cost to savings ratio is exceeded. Refinancing can be a boon in several situations since some of the main reasons to refinance are: – Lower interest rate – Consolidate 2nd mortgage loan – Lower loan term – Lower monthly payments – Payoff other personal loans and – Take cash out from equity
One of the most intriguing effects of low mortgage rate is the dilemma faced by the borrowers about whether to reduce their payments or the length of the loan term itself. Lower rates allow you to reduce your mortgage from say 25 years remaining to 15 years remaining with the same monthly payment. The next thing you would like to do is refinance again so that you will be able to reduce it to 10 years.
Another common rationale for refinancing and taking the equity out of your house as an effect of low mortgage rate is to be able to pay off credit card debt. You can also opt for a debt consolidation loan. By reducing your payment you will be able to pay off higher rate debt like credit cards. But try to eliminate interest payments wherever possible. The average credit card will have an interest rate of 18% to 25%. You can actually get rid of those high rate credit cards by taking advantage of the low mortgage rates. Also by lowering your debt you will be actually saving for the future.
It is also vital to understand that in most cases the loans are adjustable rate mortgages. The adjustment period may vary significantly depending on the loan program you are considering. You might not realize the effects of low mortgage rate unless you consider the stability and vulnerability of the interest rate that you are required to pay throughout the repayment tenure. Hence it is important to bear in mind that not only the current effects of low mortgage rate, but also effects of any future rise in interest rates should be considered when opting for a variable rate mortgage.
Over the last few years, many people squeezed into new homes using adjustable rate mortgages. With interest rates going up, you now need a new interest rate strategy
Adjustable Rate Mortgages ARMs
Adjustable rate mortgages carry a bit of a gamble for home owners. Essentially, you trade smaller interest rates and lower initial payments on the gamble rates will not increase over time. If rates stay low, you make out like a bandit. If rates increase, you need to consider your options to avoid getting stuck with a high interest rate loan and resulting cash flow problems from increased monthly mortgage payments.
For the last three or four years, adjustable rate mortgages have been offered with incredibly low interest rates. Many people used these low, low, low rates to buy homes that would otherwise be beyond their means. Starting in 2004, Federal Reserve Chairman Alan Greenspan started making noises about increasing money borrowing rates. He has followed through on these hints. Although mortgage rates arent tied directly to the Federal Reserve Bank, they are heavily influenced by it. As a result, many people are now facing tight finances.
Avoid Rising Rates
There are really only two solutions for avoiding the increase in interest rates on adjustable rate mortgages. The first strategy is to immediately convert to a fixed rate mortgage product. Fixed rates are still at historic lows when compared to rates offered over the last 50 years. By flipping to a fixed rate, you will be able to solidify your budget and finances since you will know exactly what you have to pay each month. If rates decrease in the future, you can always try to flip back to an adjustable mortgage loan.
Unfortunately, some home owners are simply going to have to face the fact they lost one the interest rate gamble. Typically, this will occur when you realize you simply cant afford to make the monthly payments required by getting a fixed rate loan. In such a situation, you are going to have to sell your home and downsize. In most situations, it is better to do this now since youve probably built up a sizeable chunk of equity over the last few years and want to avoid a loss of that equity as the market cools down. While this may sound like a disaster, it really isnt. Yes, you have to downsize, but you should still have built up a chunk of equity.
Interest rates are going up whether you want to acknowledge it or not. The time to deal with your adjustable rate mortgage is now, not when you straining to make payments.