Mortgaging into the American Dream
A mortgage, in simple terms is, is security against the failure to complete a task. Say for example, you take a loan, the bank will only give you that loan if it knows for a fact that it can reclaim that money from you regardless of whether you can pay it back or not. How does the bank do that? Well, through mortgages. Mortgages are agreements which allow the bank to seize your asset as security in terms of complete default of your loan.
The bank, typically, lends you a large amount of cash, which may go up as high as eighty percent of the total cost of the house. This loan is payable over time with added interest and the particulars are there for consideration between the bank and the loanee. If the loanee fails to pay back the loan, the bank under a process called foreclosure, seizes the house. The past few decades had only one type of mortgage available which were fixed-interest thirty year mortgages. The rates for these thirty year mortgages have fallen to the lowest US mortgage rates since July 2013 to around 4.1 percent. The 80s saw the addition of mortgages known as Adjustable Rate Mortgages (ARM). ARMs are loans which have a very low initial interest rate and that rate can be adjusted in the life cycle of the loan. Things got ugly as the banks started to try to entice unqualified borrowers who they knew would not be able to pay back the amount through ARMs with rate adjustments at shorter periods, exceedingly low initial rates with no ceiling on the increase of the rate.
The now famous economic breakdown of America saw more than a quarter million homes entering foreclosure proceedings which later reached a million homes by 2010. In retrospect, it is evident that borrowers did not know the details of the mortgages they signed with studies claiming that almost thirty five percent of all ARM borrowers did not know of the ceilings on their loans interest rate increases.
Fixed rate mortgages offer interest rates that never change throughout the life-cycle of the loan. This means that the monthly payments also remain constant for the time period of the loan which may stretch all the way to thirty years. With changes only expected on taxes and insurance, the total amount remains consistent throughout the loan.
The rates of such a mortgage are inexplicably linked to the economy of the state in general. Interest rates are higher in a growing economy than during recession. Thirty year mortgages make the borrower pay the most through interests and it does allow for the deduction of monthly payments from taxes. This rate also ensures the lowest monthly payments. The relationship of the economy to mortgage rates can be seen through the explanations for why the thirty year mortgage rates have fallen. The lowest US mortgage rates since July occurred due to the jobs report being lower than projected with payrolls increasing less than how much economists originally thought they would. A lower payroll increase means that the borrower cannot pay higher interest rates.
Bio:
James is a financial consultant for various financial institutions. He travels the country delivering lecturing and advising on mortgages and loans as well as monitoring the trends of the market such as the lowest US mortgage rates since July. He is available to answer any queries that anyone may have regarding the market and whether the interest rates and terms offered by banks are suitable.
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Category: Family Finances
