A loan taken out to finance a home and which is made up of many components such as collateral, principal, interest, taxes and insurance is called mortgage. These components are defined 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 generally determined by the lender and can be either fixed for the entire term of the mortgage or be variable being dependent on the fluctuating rates in the market. But for the most part, mortgage rates are variable depending on the rise and fall of interest rates floating in the homebuyers’ market.
The most influencing indicator for the rise and fall of mortgage rates is the 10-year Treasury bond yield, such that any indication for the yield to rise and drop, so, too, with mortgage rates, respectively. Basically, mortgages are calculated for a 30-year time frame, but most of mortgages are already paid after 10 years or refinanced for a new interest rate. From this observation, the 10-year Treasury bond yield becomes a standard indicator. Another form of indicator would be the current state of economy, such that if the economy is bad, the investors will usually turn to bonds to secure their money and with this situation, 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. When the economy is flourishing, more investments come in producing increase of the bond yield and, thereby, resulting to an increase of mortgage rates.
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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 that possibility, the higher the risk factor, the higher will be the mortgage rate, in which the higher rate ensures the lender to recoup the principal at a faster time in case of a default from the borrower, thereby protecting the lender’s financial investment. When the credit score or financial background of a borrower is good, he/she has the financial capacity to repay his/her debts and so this provides a basis in determining the mortgage rate. When the borrower has good credit standing, the lender can lower the mortgage rate since the risk of default is low. Therefore, borrowers should look for the lowest mortgage rates based on the given indicators and determining factors.A Simple Plan: Mortgages