Mortgages and Mortgage Rates
A mortgage is a loan applied for the purpose of financing a home and consists of many components such as collateral, principal, interest, taxes and insurance. The mentioned components make up the mortgage and are described as – the collateral of the mortgage is the house itself, the principal refers to the original amount of the loan, taxes and insurance are part computation and requirement in applying for a mortgage and are computed according to the location of the home and the interest charged is known as the mortgage rate.
Mortgage rates are determined by the lender in many benchmark rates, such that rates can be fixed staying for the term of the mortgage or variable fluctuating with the interest rates taken in the market or in the bank. But for the most part, mortgage rates are variable depending on the rise and fall of interest rates floating in the homebuyers’ market.
It is the 10-year Treasury bond yield which is the biggest indicator for the mortgage rate to rise or drop, in which case, there is a directly proportional influence, such that if the bond yield increase and drop, so will the mortgage rate, respectively. The fact that most mortgages are computed for a 30-year frame, but after 10 years, many of the mortgages are already paid off or go through a refinancing for a new rate. With that observation, the 10-year Treasury bond yield becomes a safe, standard indicator. In addition, the current state of economy can also be a good indicator, such that if the economy is poor, most investors secure bonds to protect their money and if this happens, the bond yield drops. Therefore, a bad economy results into a drop of the bond yield, consequently, affecting the mortgage rates to drop, which in turn attracts more borrowers. On the other hand, if the economy is booming, investors seek for investment opportunities resulting into a rise of the bond yield and allowing mortgage rates to increase.
A lender will always be confronted with a certain degree of risk when he/she issues a mortgage since there is the possibility that the client may default on his/her loan. With a risk of a default possibility, the higher the risk factor will effect into a higher mortgage rate, in which case, this will help ensure the lender to recover the principal amount in a faster period, thereby protecting the lender’s investment. Another determining factor is the borrower’s financial history or his/her credit score, which tells that the borrower is more likely to repay his/her debts. In which case, the lender can lower the mortgage rate since the risk of default is lower. With the above indicators and determining factors, borrowers must look for the lowest mortgage rates.
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