Finding the Best Mortgage

Is the lowest interest rate really the best mortgage for you? That really depends on the conditions of the loan. Typically, the longer the term of the loan, the higher the annual interest rate will be. This differential is built in to cover the erosion of the value of money over time by inflation. The amount of principal you pay will also count towards the interest rate.

You need to get an idea where the interest rates are moving. During this period of financial crisis, the Federal Reserve Bank has lowered the prime rate to about as low as it’s ever been. This means some phenomenal deals are available right now in the mortgage world, but people are hesitant to take them due to uncertain financial positions. However, we suggest you network and talk to your friends and neighbors. Don’t be afraid to ask them about the conditions of their mortgages and how they went about obtaining their loan.

What Kind of Loans and Interest Rates will Work Best for Me?

A 20 year Adjustable Rate Mortgage may have a lower advertised interest rate, than a 30 year fixed Mortgage, but determining which is best for you will depend on several factors.

It’s strongly recommended that you determine your debt ratio and figure out your gross income before applying for a loan. Lenders will often use what is called a Front-end Ratio which is a function of your monthly gross income. The amount of your monthly payment on the mortgage should be anywhere from 29 to 33 percent of your gross monthly income.

Another way to calculate your debt ratio is using what is called a Back-End ration. In this case, your gross revenue is also taken into consideration, but so is your recurring monthly payments such as car lease payments or utilities. This is a more complicated function, but you should inquire as to how your debt ratio is being calculated.

How Much Should I be willing to Pay For a House?

Paying anywhere from two to six times your annual salary is a good benchmark when determining what sort of home is in your price range. But keep in mind that if you have large monthly debt payments, you may not be able to afford a home that is worth six times your annual salary.

There are a couple of factors influencing the interest on your mortgage that are worth noting. Inflation has been very low, but in the 1970’s annual inflation soared into the double digits, forcing banks to charge extremely high interest rates to compensate for the changing value of money over time.

The other factor affecting the interest rate of your mortgage or loan is market conditions. The market functions in the following way. The company that will be providing you a loan is called an originator, and this originator may be a credit union or bank or other financial institution. Often times, the originator will send the lean to another institution, so that it isn’t short on cash and can continue to make loans. The secondary market is populated by large banks and also companies like Fannie Mae and Freddie Mac. These companies often aggregate these funds into what are called mortgage backed securities, which are highly liquid securities bought and sold in capital markets.



How Can I Find the Best Mortgage for Me?

Here’s what this market means to you as a borrower. The rate of interest that you pay is determined by the current and anticipated activity of the economy. When the economy is in a slump, but is expected to surge ahead at some future date, then future returns are expected to be better than current yields. Investors will defer purchasing these secondary contracts, and this drives interest rates up. Inversely, when the economy is doing well, but is expected to tank at some future date, then investors will snap up all the available loans at attractive returns which tend to drive interest rates lower. The timing of your loan vis-à-vis this market will then play an important role in determining your rate of interest.

To be sure you’re getting the best mortgage available to you, it’s best to speak with an expert. Fill out our free contact form, and one of our experienced professionals will help you find the most cost efficient Home Loan for you.