Posts Tagged interest rates
Mortgage Bits: Cheap Money to Continue Indefinitely
Posted by Top Home Loans in Credit Information, Economy, Investing, Mortgage Rates on November 9th, 2009
Over the weekend, the G20 met to discuss cheap money. Interest rates have been at record low levels for periods of over a year and show no sign of increasing. These low interest rates, in an effort to defer recession, have been continued on in an attempt to restore the economy.
So far this has shown some positive gains, and the manipulation of monetary policy has saved thousands of jobs and has kept the economy from imploding.
How long can we have cheap money for? As long as the inflation rate is kept lower than the interest rates, then the interests rates can be kept at these low levels. However, once enough money has been returned to the marketplace, then interest rates will begin to go higher.
Unfortunately, while interest rates remain low, you may see your pay check staying the same or decreasing over the next few years.
When will the economy finally recover?
Unfortunately, the G20 said they need to continue to keep interest rates low to stimulate the economy. This is a bad sign for many; however, enjoy the cheap money while you can, someday it will be gone soon it will be gone.
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Mortgage Basics; What is a Mortgage?
Posted by Top Home Loans in Credit Information, General Business, Mortgage Advice, Mortgage Rates on June 19th, 2009
The simple explanation of a mortgage is that it is a leveraged secured loan against a piece of real estate. It is paid off in monthly payments that are spread out over many years (25+ years).
This simple explanation is really all most people care to know, but to really understand what a mortgage is, then you must understand a bit about the process of creating a mortgage.
The Mortgage Creation Process
When a financial corporation is created, the company’s first goal is to raise capital for lending. This is completed by the banks offering bonds to retail investors to shore up capital. These bonds have interest rates based on supply and demand of the products. The mortgage rates are then based on a spread above the going bond rates. The mortgage rates must take into consideration overhead, revenue, supply and demand, and hedged bond rates.
After the mortgage rate is set, then the lender can offer the product to the market. The lender will determine a list of qualification criteria that the borrower must meet to get approved. This criteria is higher or lower based on the interest rates offered by the lender.
The lender will then seek out approved borrowers. The borrowers will then finalize the deal with their solicitor and the bank will forward the raised capital to the solicitor to disburse.
The lawyer will then register a lien against the property for the financial institution, so if the borrower defaults, then the bank retains the rights to the property. The borrower would make regular repayments until the investment is paid in full.
The bank also has the option to sell the mortgage to other investor’s. The investor’s will achieve greater gains than regular investments but will have a higher risk on the investment.
What does this all mean to the borrower?
The mortgage is a loan that is specifically used when real estate is involved. For example, when you are looking to purchase a property, then you will most likely not have enough money in cash to buy it in full. Instead, you may be able to afford five or ten percent of the purchase price only.
This means that in order to purchase the property, you can either save until you can afford it, or you can geta loan for the rest of the money.
The loan is in today’s dollars, and the purchase price of properties usually increases. With property being a limited resource, the value of the land usually increases even if the market value of the house goes down.
The bank will lend you the money if you are approved, and the lawyer will transfer the money to the seller. The bank and the borrower will determine terms of the repayment of the loan, and upon completion of the loan repayment, then the lien will be discharged from the property.
How much You can Afford when Buying a New Home? Not how much You can be Approved for!
Posted by Top Home Loans in General Banking, General Business, Mortgage Advice, Mortgage Rates, Retirement Planning on June 11th, 2009
However, before placing your final offer, consider what you may be looking at in several years in the future.
How much You can be Approved for?
When getting approved for a mortgage, the bank will calculate the maximum mortgage payment that you can afford to be, at the absolute maximum, approximately 40% of your annual income. To describe this in actual numbers let’s use the following situation:
Your Annual Income: $40,000
Interest Rate: 4%
Amortization: 35 years
Your Property Taxes: $200/month
You have no outstanding loans, lines of credits, car loans, credit cards, etc.
You could potentially purchase a property for $300,000
Now you will be thinking ‘wow, I can buy a great house with such a little annual income’; however, this is definitely not the case.
Albeit, the bank may approve your mortgage, but let’s compare your take home dollars versus your household upkeep:
Total Mortgage Payment: $1,456.28
Total Monthly Property Tax Payments: $200
Monthly Home Insurance Payment: $62.50 approximately
Monthly Utility Bills: $300/month
Monthly Food Bills: $5/day or $150/month
Transportation: $200/month
Entertainment and Communication: $100/month
Total Expenditures: $2,468.78/month
Total Income: $40,000
Taxes and Other Deductions: $8,698.58
After-Tax Income: $31,301.42
After-Tax Monthly Income: $2,608.45
This means that you have a monthly surplus of $139.67 when living on an extremely light budget.
What Happens if Interest Rates go up?
When first applying for a mortgage, the bank is more than happy to approve your mortgage with a financial situation like this, but when you analyze what will happen if interest rates go up, then if some major financial improvements have not been made for the borrower, then the borrower could be in big trouble. Let’s see what happens if rates rise 50% and 100%.
Mortgage Amount: $300,000
Mortgage Rate: 6%
Mortgage Payments: $1,695.76
Payment Increase: $239.48
Mortgage Amount: $300,000
Mortgage Rate: 8%
Mortgage Payments: $2,102.48
Payment Increase: $646.20
These are incredible increases, and it will cause the borrower to go from a surplus budget to a deficit in a short amount of time. This will cause the borrower to have to refinance the equity from the property to keep up with the payments, or the borrower will have to have an ever increasing income.
Don’t think that these rates can happen? Take a look at a Historic look at Prime Rate
Why would the Bank lend like this?
The bank lends like this because they are assuming that the property value will increase, and that the borrower’s income will increase with inflation. The loan is based on today’s dollars, while the future payments are based on future dollars. Although, it appears to be a large increase in payments with the change in interest rates, but the bank is hoping that a portion of their clients will be able to make the payments, some will have to refinance to be able to afford the property, and a small percentage will default on the loan.
Even though some of the borrowers default, the bank is still expecting that the property values have increased, so they can sell the property at a profit.
Protect Yourself from Perpetual Debt or Default
By purchasing a house that has mortgage payments that are well within your means is a great way to prevent either of theses situations. By applying the additional surplus that you will have against the principle balance of your mortgage, then you will be able to pay your mortgage off quicker. As you pay down your mortgage, then you will be able to get away with lower monthly payments. In a few short years, you will be able to upgrade your property to a much bigger property with fairly low monthly payments as well.
By keeping your mortgage balance low, your payments low, and your budget surplus high, then you will be able to get debt free faster, and have more money to buy the home of your dreams without the risk.