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Understanding Mortgage Rates Mortgage is basically the amount of loan used to finance a home and which consists of 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. Mortgage rates are determined by the lender in many benchmark rates, such that rates can be fixed staying for the term of the mortgage or variable fluctuating with the interest rates taken in the market or in the bank. Characteristically, mortgage rates float according to the market’s interest rates, so the effect is a rise and fall of mortgage rates. 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. It has been observed that even if the time frame for mortgages are computed for 30 years, most mortgages are already paid in 10 years time or the mortgage goes through a refinancing for a new rate. Therefore, the 10-year Treasury bond yield becomes a standard benchmark. 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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There will always be a level degree of risk which a lender assumes when he/she issues a mortgage since it would be possible that the client may default 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 a borrower has a good financial history, he/she has the capacity to repay his/her debts and this situation can be considered also as a factor to determine 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.Lessons Learned from Years with Lenders