As a buyer or consumer, your mortgage interest expenses can improve your property costs by hundreds of thousands of dollars through the years. On the other side of this table, the lender collects interest payments to improve its bottom line. As a potential homeowner, it is crucial to specify how mortgage interest rates are calculated. From that point you can devise an effective property strategy to set up riches, while also guarding against foreclosure.
Identification
Your mortgage contract specifies terms for a loan that is to be backed by property. To secure its own financial interests, the bank or other lending institution will rarely approve a loan principal amount that exceeds the initial appraised value of your property. The bank accumulates interest payments in exchange for making the home mortgage.
Features
The lender charges mortgage rates based on dangers. First, the lender will examine the size and purpose of the mortgage. You can expect interest rates to increase for larger accounts. Mortgage rates are even higher for investment properties. The bank feels that a resident-owner should be highly encouraged to maintain his mortgage current to prevent eviction and foreclosure. Alternatively, an investor can simply abandon a failing project and refuse to pay the mortgage due to a scarcity of rental income.
Considerations
Throughout the mortgage underwriting process, the lender will review your personal finances to ascertain your ability to make timely payments. The lender will charge interest rates so. Your credit report and FICO score are particularly important. According to Bankrate.com, keeping a FICO score over 760 permits you to negotiate the lowest mortgage rates. To secure a competitive rate, you also want to apply for a home loan and payment that fits in your budget. Generally, an inexpensive mortgage payment drops between 28 and 33 percent of your gross monthly income.
Types
Your mortgage could be classified as a fixed-rate or pre-tax mortgage (ARM). A fixed-rate mortgage carries the same interest rate during its loan duration, which might be 15 or 30 years. Alternatively, an adjustable-rate mortgage features variable rates that shift based on economic conditions. Most ARMs are pegged to a certain interest rate index, such as the 12-month London Interbank Offered Rate (LIBOR). For instance, your monthly ARM speed may add a 5% premium to current LIBOR.
Caution
All mortgage products feature interest rate risks that can hurt your bottom line. As a traditional house buyer you may covet a fixed-rate mortgage to lock in a specific interest rate. If prospective interest rates fall, however, you might be stuck using a relatively pricey home loan. Conversely, Investopedia associates ARMs with payment shock caused by significant interest rate increases that interpret unaffordable mortgage obligations. Bear in mind, the foreclosure process starts after 30 days of missed payments.