Mortgage Rate Arrangement Simplified?

When looking for a mortgage, it’s essential to understand the different products that are available so you can be sure you get the right one for you. Lenders offer different interest rate options and this will affect your monthly payments. So choosing the right deal could save you money.

With so many product choices available it is essential you get professional indepenedent advice.

Types of mortgage products available:

Standard Variable Rate Mortgage

With this mortgage, your payments will go up and down as the lender’s standard variable rate goes up or down. Usually any changes in the lenders variable rate will be in line with movements in the Bank of England base rate. The Bank of England Monetary Policy Committee reviews this rate on a monthly basis.

Is it right for me?

Yes – if you can afford to pay more when mortgage interest rates go up and want to take advantage of lower payments if rates fall.

No – if during the early years you would be unable to cope if repayments increased because of rising interest rates.

Base Rate Tracker Mortgage

This is similar to a variable rate mortgage. But the interest rate will go up and down exactly in line with any changes in the Bank of England base rate. Your mortgage payments will go up and down too as the interest rate changes. The tracker period is usually for a specified time, which can be from one year up to the lifetime of the mortgage loan. At the end of the tracker period, your mortgage interest rate will change to the lenders standard variable rate. This product may carry an early repayment charge.

Is it right for me?

Yes – if you want to be sure your mortgage rate falls by the same amount as the Bank of England base rate falls, but the drawback is the mortgage rate also rises in step when the base rate increases.

No – if you find yourself locked into a rate above the base rate, which may be higher than the standard variable rate.

Fixed Rate Mortgage

Your mortgage interest rate is fixed for a set period only, during which your mortgage payments will stay the same. At the end of the fixed rate period, your mortgage interest rate will change to the lender’s standard variable rate. Fixed rate mortgages are usually available for between one and ten years, however they can be available for longer periods depending on market conditions. This product may carry an early repayment charge.

Is it right for me?

Yes – if you need to budget with certainty for the next few years, or you think mortgage interest rates will rise, or both.

No – probably not if you think mortgage interest rates will fall.

Discounted Rate Mortgage

The lender offers a discount off their standard variable rate for a set period, normally one or two years. Your mortgage payments will still vary in line with changes in the standard variable rate. At the end of the discount period, your mortgage interest rate will be the same as the lender’s standard variable rate. This product may carry an early repayment charge.

Is it right for me?

Yes – if money is tight when you first take out the mortgage, but you’re confident your income will increase.

No – if you won’t be able to cope if interest rates rise later on, increasing your payments.

Capped & Collar Rate Mortgages

With a capped rate mortgage the interest rate can go up or down in line with movements in the lender’s standard variable rate, but cannot go above a set upper limit, known as the ‘cap’ or ‘ceiling’. This type of mortgage can also have a set lower limit, known as the ‘collar’. For these mortgages the interest rate can move between these limits but cannot fall below the collar or go above the cap. This product may carry an early repayment charge.

Is it right for me?

Yes – if you like to budget with some certainty, think mortgage interest rates might rise above the cap, or you want the security of knowing your payments cannot rise above a set level and would like to benefit from any fall in interest rates.

No – if your mortgage adviser can find a fixed rate set at a lower rate than the capped rate, and you think rates are unlikely to fall below the level of the fixed rate deal.

Cashback Mortgage

The lender pays you a cash lump sum after completion, which you can use for any purpose. This product may carry an early repayment charge.

Is it right for me?

Yes – if you need a cash lump sum, for example to do up your home, or you expect the cashback to more than compensate for any rises in interest rates during the period when an early repayment charge may apply.

No – if you can manage without a cashback now and can get an alternative deal.

Remember your home may be repossessed if you do not keep up repayments on your mortgage.

Buy Your First Home by Qualifying for a Cheap Mortgage Loan

Do you want to buy your first home?

There is probably no person in the planet who does not want to have his own home. The desire to have a home can be a very strong motivating force for someone to work really hard and save up enough money.

Is it difficult to buy a home? It will be if you do not have the means to pay for it. But if you make the necessary preparations, you should be able to find and buy a home that you like.

Having a real estate broker or a lender should be helpful especially since you do not know much about purchasing a house. They can help you take out a mortgage that will help you purchase your very first home.

What is a mortgage and how does it work?

A mortgage is a loan that you take out to buy a home. Your house then functions as the collateral for the loan.

The reason people take out loans is not everyone has enough money to pay for a house in one go. By having a loan, anyone will be able to spread out the payment for the home. Instead of paying for the house right then and there, you get to pay for it in a span of several years.

It works this way:

When you plan to buy a house, you approach a bank or mortgage lender and apply for a loan. Based on your qualifications or your ability to pay off the loan, you will be awarded with a mortgage.

This loan, where 80% is the amount of the home and the rest is interest, will have to be paid over a set period. Loans can be paid within 30 years. Typically, the lender and the borrower will get to determine how long the loan has to be paid.

Failure to pay back the mortgage loan can lead to foreclosure, a procedure where the lender can take away your home.

What are the different types of mortgages?

Typically, there are 2 types of mortgages: fixed-rate and adjustable-rate mortgage loans.

Fixed-rate mortgages are those whose mortgage interest rate remains the same throughout the term of the loan. 30-year fixed rates are among the most common types of mortgages homebuyers apply for. There are other options like 15-year fixed rates and convertible mortgages.

This offers homeowners predictability. Since they know how much they are going to pay, they will be able to prepare for it no matter how much their financial circumstance changes.

One downside to this kind of mortgage is that it can be more expensive than adjustable-rate mortgage.

Adjustable-rate (or variable rate) mortgages are mortgages that adjust depending on the current rate. This means the mortgage rate can fluctuate depending on how the market does. It can go up or it can go down.

These mortgages became popular when fixed-rate loans were hard to qualify for. This is advantageous to certain types of borrowers who may have a little difficulty qualifying for conventional mortgage.

The downside to this is that you may end up paying more when the rates increase. And if you are looking for a cheap mortgage loan, this may not be the safest choice for you.

How can you find the best mortgage loan for you?

The simplest answer to finding a cheap mortgage loan is to work with a really good mortgage broker. A broker is someone who has the knowledge, skills, and experience in helping you get a mortgage loan application approved.

Mortgage brokers know a lot of lenders. That means they can bring you to different lenders who can offer you a good mortgage deal. It’s up to you, with your broker’s guidance, to choose which among the deals is suited for you.

Can you get approved for a cheap mortgage loan?

Of course you can get approved for a cheap mortgage loan. You just have to make sure you are working with a good mortgage broker.

Aside from that, you have to ensure you meet most, if not all, of the requirements that lenders impose. You must prove your employment and your credit score must be favorable.

Don’t worry if you have some problems with any of the requirements because your mortgage broker will help you smoothen out any problems.

Once you have done all these, you will be able to buy your first home.

Mortgage Rates and Factors That Move Them

Mortgage rates come in different varieties as you may know. Fixed rate loans are usually most popular due to the fact that you don’t have to worry about rates going up on you over time. Currently in July, 2014 rates are still down near historic lows, although they were even lower last year. The amortizations come in 30 year, 25 year, 20 year 15 year and 10 years with most lenders. The big price break is going to be with a 15 year loan. Currently the spread between the 30 year fixed and 15 year fixed rate is 3/4%.

For those who intend to hold onto their home for the long term, and not sell in the near future, the fixed rate mortgage may be the best option. However, for those who are fairly certain that they will be selling in the not too distant future, the hybrid ARMs such as the 5/1, 7/1, and 10/1 ARM could be a better option.

The spread between the 7/1 ARM and the 30 year fixed is also about 3/4 %. (4.375% VS 3.5%) So going with a 7/1 ARM will lock in your rate for the next 7 years and you don’t need to be concerned about rates rising. Here in the summer of 2014, rates are still down, but they will not be down forever.

Mortgage rates are normally quoted in 1/8% such as 4.125%. However, when you see a rate like 4.258% this is the annual percentage rate (APR) for the quoted rate. The APR is usually higher than the note rate when the loan contains closing costs which are being financed into the loan.

So what causes rates to go up and down? Although there are many factors affecting the movement of mortgage rates, probably the best indicator is the 10 year treasury bond yield. This is due to the fact that for most people, a 30 year fixed rate mortgage is paid off within 10 years either from the sale of the home or refinanced. Treasuries are also backed by the “full faith and credit of the US” which makes them a benchmark for other bonds as well.

Normally when the T-bond yields go up, mortgage rates also go up and vice versa. They may not go up exactly the same as yields though. There are also many reports that affect mortgage rates. The Consumer Price Index, Gross Domestic Product, Home Sales, Consumer Confidence, and other data on can have a significant effect.

Normally, if there is good economic news, rates will go up and with bad news rates will move down. If the stock market is rising mortgage rates will usually be rising also since both rise on positive economic news. Also when the Federal Reserve adjusts the Fed Funds rate, mortgage rates can go up or down. If it is a growing or inflationary economic pattern then rates will rise.

During the processing of your mortgage loan, normally your broker will lock in your rate for you to protect you in case rates rise while your loan is being processed. Locks go from 15 to 45 days with most lenders. This gives the broker enough time to process your loan and get it funded.

Keep in mind that the interest rate on your loan may be adjusted for various factors. Do not be taken in by a par rate. If you are doing a loan at a high loan to value (LTV) and you have a lower credit score (<700) there will be adjustments to your rate. The par rate is the rate at which the lender who is funding your loan neither charges or credits back any rebate to the broker. By picking a rate above par, you will receive this lender credit and it can be used to assist in paying your closing costs and prepaid expenses such as property taxes, hazard insurance, or interest.