A mortgage is a loan applied for the purpose of financing a home and consists of many components such as collateral, principal, interest, taxes and insurance. The mentioned components make up the mortgage and are described 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.
In most cases, it is the lender that determines the interest rates in the mortgage and how the lender determines this may be taken from benchmark factors that can affect his/her lending business, so he/she can either give a fix rate which stays for the term of the mortgage or a variable rate that would be influenced by the market or bank rates. But for the most part, mortgage rates are variable depending on the rise and fall of interest rates floating in the homebuyers’ market.
The biggest, influencing indicator for a high or low mortgage rate is the 10-year Treasury bond yield, which if the bond yield rises, the mortgage rates rise, too, and so when the bond yield drops, so will the mortgage rate. 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. Therefore, the 10-year Treasury bond yield becomes a standard benchmark. In addition, the current state of economy can also be a good indicator, such that if the economy is poor, most investors secure bonds to protect their money and if this happens, 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 a risk of a default possibility, the higher the risk factor will effect into a higher mortgage rate, in which case, this will help ensure the lender to recover the principal amount in a faster period, thereby protecting the lender’s investment. Another determining factor is the borrower’s financial history or his/her credit score, which tells that the borrower is more likely to repay his/her debts. In which case, the lender can lower the mortgage rate since the risk of default is lower. With the above indicators and determining factors, borrowers must look for the lowest mortgage rates.How I Became An Expert on Homes