What is the Mortgage Interest Rate?
A rate which is charged or paid for the use of money. An interest rate is often expressed as an annual percentage of the principal. It is calculated by dividing the amount of interest by the amount of principal. Interest rates often change as a result of inflation and Federal Reserve policies.
For example, if a lender (such as a bank) charges a customer $90 in a year on a loan of $1000, then the interest rate would be 90/1000 *100% = 9%. The interest rate on a mortgage has a direct impact on the size of a mortgage payment - higher interest rates mean higher mortgage payments. So, for most home buyers, higher interest rates reduce the amount of money they can borrow, and lower interest rates increase it. If the interest rate on a $100,000 mortgage is 6%, the combined principal and interest monthly payment on a 30-year mortgage would be something like $599.55 ($500 interest + $99.55 principal). The same loan with a 9% interest rate results in a monthly payment of $804.62.
However, mortgage rates are not the only determining factor when calculating monthly payments on a home mortgage. As a result of the Truth in Lending Act, which was passed in 1968, lenders are required to disclose the annual percentage rate and total finance charge assumed by the borrower. The annual percentage rate (APR) is the total effective interest rate paid on the loan when calculated as a yearly rate. In calculating the total interest paid back, consumers must also take into consideration origination and discount points. Origination points are lender fees charged for initiating the loan. Discount points are points paid to reduce the overall interest rate. Each point is reflected as 1% of the total loan amount. For example, a $500,000 loan with one origination point, one discount point, and a 5% listed fixed interest rate, would add a $10,000 fee to the loan amount. Therefore, the total loan amount would be $510,000, and the annual percentage rate would be 5.1748%.
The APR allows consumers to easily compare mortgage rates between lenders. However, the APR cannot always provide borrowers with the exact total cost of borrowing. One-time fees including appraisal, home inspection, credit report, title, and some preparation fees are usually not included when calculating the APR. When applying for a mortgage, consumers can choose between several types of mortgage interest rates including the popular fixed mortgage rate, variable/adjustable mortgage rate, or a combination of both.
What All to Consider While Selecting a Good Mortgage Rate?
While mortgage lenders control who gets approved for a loan and on what terms, actual mortgage interest rates themselves are largely determined on the secondary market, where mortgages are bought and sold. As with the stock market, interest rates in the secondary market tend to move up and down. When the economy is on an upswing, investors demand higher yields, forcing lenders to raise mortgage rates. In a market downturn, rates tend to drop for consumers due to increased investor demand.
To obtain the best possible mortgage rate, track as many financial trends as possible for as long as possible and time the purchase of your home accordingly. Generally, your mortgage rates vary primarily based on the type and purpose of the loan, your credit history and income, loan amount, value of the property, and the number of points you are willing to pay. Your personal expectation for the future of interest rates, your tax bracket and adversity to risk are also important factors to consider when choosing a mortgage rate.
Before deciding which rate to get, look at the whole product. Pay close attention to the terms of a loan including the type of the mortgage, the presence of prepayment penalties, low or high downpayment, mortgage insurance requirements, payment schedule, lock-in period and many other features. Pick the loan with the rate and other terms that suit your situation best.
Will the Mortgage Interest Rates Rise or Fall in 2015 and 2016? Why?
Since the subprime crisis, the monetary crunch which U.S. confronted in 2008, the home loan rates are at their least level. In the financial crunch, majority of the individuals were not able to pay their home loan installments because of the high rates of investment. Federal Reserve made extreme moves to determine the compelling monetary emergency. Short term interest rate were dropped down to insignificant, to help families and companies have new purchases, so as to stabilize the economy. Because of the low interest rates individuals were capable to purchase homes and had other buys which moved the economy towards development.
Predictions for interest rates in 2015 and 2016
It is currently an accord that investment rates are required to climb toward the end of 2015 as the U.S. economy has maintained a low level of interest rates for around 6 years, and now the economy has displayed amelioration in distinctive sectors. The Federal Home Loan Corporation also called as Freddie Mac, has likewise anticipated an ascent in Interest rates up to 5% in advancing year.
How interest rate vacillates in economy:
- Federal Reserve System:
Federal Reserve System commonly called as ‘Fed' is the chief agency of United States for monetary control in the economy. The Fed is an exceptionally indispensable part in controlling the interest rates in the economy, by changing the fiscal strategy as the necessity. It aims:
- To maintain maximum employment rate
- To stabilize the prices
- To maintain long term interest rate at moderate level
- Inflation: It is the rate at which the prices of goods and services rise. It decreases the real income or the purchasing power of the consumer as he gets less quantity of goods in the same amount or in other words he has to shell out extra dollars for the same amount of goods which earlier he purchased in less.
- Federal Fund rates.: The most imperative approach to attain security is by controlling the federal funds rates. It the rate which banks charge one another for long term loans, which impacts the rate in the economy
- Treasury Bonds: Interest rates are directly connected with the treasury bonds and government securities as the rates of these bonds goes up mortgage rate also rises and vice versa.
Indications of interest rate rise:
- As the Chairwoman of Federal Reserve Board Dr. Janet Yellen said on June 18, 2014 that the U.S. economy is now on the track of economic growth and also unemployment rate has declined, labor market has improved so now there are good reasons to expect a higher growth rate in 2015 and 2016.
- Housing sector is now in improved condition than in 2008
- The rate of Mortgage delinquencies has reduced over the period.
- Federal deficit is now at a consistent level as compared to GDP.
- State and local governments have thwarted their retrenchment program
- Acute reduction in energy prices most importantly the price of crude oil, which is at its lowest level in the last 6 years.
- Inflation rate is below the Federal reserve's aim of 2%
- The rate of economic growth has shown a pace in the last one year
- Federal Reserve is closing its quantitative program, in which it buys treasury bonds and securities.
- Mortgage have now adopted a stringent and constrained outlook towards the borrowers with low level credit scores.