Mortgage – A legal agreement that conveys the conditional right of ownership on a property by its owner (the mortgagor) to a lender (the mortgagee) as security for a loan. The lender’s security interest is recorded in the register of title documents to make it public information, and is voided when the loan is repaid in full.

What Determines Interest Rates

    Mortgage interest rates are determined mostly on the secondary market, where mortgages are bought and sold. Fannie Mae and Freddie Mac are huge financial institutions that buy mortgages and bundle them into securities that behave like bonds. Then they sell the mortgage-backed securities to investors. When you get a mortgage, the lender sells the loan on the secondary market. By selling the mortgage, the lender gets its money back quickly so it can lend the money again, to another mortgage borrower. Meanwhile, investors buy these securities because they want stable payments for a long time. It’s these investors in the secondary market who collectively determine the interest rate of your mortgage loan. Your lender offers you an interest rate that investors on the secondary market are willing to buy. Stock Market, Job Market, Foreign Markets and Inflation are some of the triggers that drive interest rates up or down as they tumble or rise.

Mortgage Qualifying Factors

There are three prime factors that a lender takes into consideration while qualify you for a loan – Your Credit History (Credit Score), Loan to Value (LTV) ratio, Debt to Income Ratio.

Your Credit Score– Your credit is one of the most important things that will be considered when determining if you qualify for a home loan. Lender analyzes the length of your credit history, how reliably you’ve paid on your loan accounts (any late payments?) and amount you owe compare to your credit limits – the higher the amount you owe the negative impact it will have on your credit. These are also the factors that determine your credit rating or credit score. Your credit score will be used to qualify you for a mortgage and will often determine the interest rate you will be offered. Credit scores used for a mortgage range between 350 (low) and 850 (high). A healthy credit score is generally considered to be above 740 and a poor credit score is anything below 600. The higher your credit score, the better the interest rate you’ll likely be offered.

Loan-to-Value Ratio – LTV ratio is basically Loan vs Property Value. It is the percentage of loan amount against the value of the property. It is determined by the down payment that you would put while purchasing a property or equity in your home in terms of refinance. If you put 20% down payment against the purchase price then the LTV is 80%. Down payment or equity work as a risk factor for the lender. Lower down payment or equity increases lender’s risk; thus, lender intend to charge higher interest. That’s why lenders charge Private Mortgage Insurance (PMI) on loans with over 80% LTV or with the new terms charge higher interest rate and call it built in PMI loan.

Debt to Income Ratio – DTI is your Income vs. Debts. Your fixed expenses including the new mortgage compared to your gross monthly income before taxes. Lenders typically want to see someone spending less than 45 percent (55 on FHA) of their gross monthly income on these fixed expenses, that includes your mortgage payment, property taxes, HOA dues, home owner’s insurance, car loans, student loans, credit cards and any other fixed payments that would show up on your credit report. Variable expenses like utilities, phone and cable are not included in your DTI.

Conventional vs. FHA

Fixed vs. Adjustable Rate Mortgage

Fixed-rate mortgage loans – As the name suggests the interest rate is fixed for the entire term of the loan. Your monthly payment will stay the same, month after month, year after year for the entire term.

Adjustable-rate mortgage loans (ARMs) have an interest rate that will change or “adjust” from time to time. Typically, the rate on an ARM will change every year after an initial period of remaining fixed. It is therefore referred to as a “hybrid” product. A hybrid ARM loan is one that starts off with a fixed or unchanging interest rate, before switching over to an adjustable rate. For instance, the 5/1 ARM loan carries a fixed rate of interest for the first five years, after which it begins to adjust annually. That’s what the 5 and the 1 signify in the name. ARM loans are linked to an index rate mostly LIBOR (London Interbank Offered Rate) index and will change in accordance to the LIBOR index when the fixed term is over.

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