The Truth about Mortgage Rates

The best rumors have the longest staying power, and the untruths about the connection between Bank of Canada interest rate cuts and mortgage rates is a prime example. Why? Well, though Bank of Canada interest rate cuts do affect the financial industry, they do not affect every segment of the financial sector; some segments are directly affected, others are only indirectly effected, and then there are segments that are directly or indirectly effected depending on the financial product. The mortgage industry falls into that third category.

Shocked? Well, you’re probably not alone. The idea that Bank of Canada discount rate changes cause mortgage rates to change is a common misconception that’s been perpetuated for years. So, let’s set the record straight!

TRUTH: When the Bank of Canada adjusts interest rates, it does affect interest rates of financial products. However, only interest rates for short-term financial products—things like car loans, credit cards, etc.—are directly affected by Bank of Canada interest rate cuts or hikes. Meanwhile, 10, 15, 30, and 40-year fixed mortgage loans are considered long-term financial products. As such, the Bank of Canada’s decisions do not directly influence fixed mortgage rates.

TRUTH: Though Bank of Canada rate cuts have no direct influence on fixed mortgage rates, the Bank of Canada’s decisions do directly sway one type of mortgage loan: Adjustable rate mortgages (ARM), which are also sometimes referred to as variable rate mortgages, IF the ARM is specifically stipulated as being tied to the prime rate.

TRUTH: Fixed mortgage rates are based on mortgage bonds (sometimes called mortgage securities), NOT the 10-year T-bill. Therefore, what actually has a direct effect on a mortgage rate increase or decrease is the buying and selling of mortgage bonds.

TRUTH: Though Bank of Canada rate changes do not have directly influence fixed mortgage rates, they can have a Domino Effect on fixed mortgage rates. How so? Well, the purpose of the Bank of Canada’s rate adjustments is often to increase or decrease consumer spending. For instance, when interest rates are cut, the goal is to increase consumer spending. As a result, investors speculating that the Bank of Canada’s tactic will work pull their money out of the bond markets (which are less volatile, low return investments) and put their money into stocks because they believe they can make greater profits from their investment. When this happens, that can cause mortgage rates to fluctuate. Remember: Mortgage bonds / mortgage securities affect mortgage rates. If money is cashed out from mortgage bonds, rates will increase. Conversely, if the monies are withdrawn from other types of bonds, mortgage rates may dip or they may remain unchanged.

So, what does all of that mean if you’re looking to modify or refinance your mortgage, or if you’re waiting for mortgage rates to change before you apply for a mortgage loan? First, it means that you should keep an ear out for what the Bank of Canada is doing regarding interest rate cuts and spikes ONLY if you’re interested in a variable rate mortgage—which would not be ideal for most consumers in the current economy. However, if you prefer a fixed rate mortgage, it means you can (and should) stop wasting your time tracking the 10-year T-bill and keeping tabs on the Bank of Canada. Instead, keep watch on what’s happening with mortgage bonds so you’ll know when mortgage rates are where you want them!

 

The Flexibility you Need: Benefits of Home Equity Lines of Credit

You may wonder what the differences between home equity loans and home equity lines of credit are.
Home Equity

When you have a mortgage on your home but the value of the property exceeds the amount owed, the difference between the outstanding debt and the property value is referred as Home Equity. This remaining property value can be used to guarantee another loan: A Home Equity Loan or Line of Credit.

Home Equity Loans are secured loans with a fixed or variable interest rate, a fixed loan amount and a fixed, though negotiable, repayment program. A home equity loan is just like any other loan, only it is secured with the equity you have built on your home and thus carries fewer interests.

A Home Equity Line of Credit on the other hand, comes only with a variable interest rate, there is no fixed loan amount, though there is a credit maximum and the repayment is extremely flexible. The home equity line of credit is also secured on the home equity.

Interest Rate

Since both are secured, the interest rate charged is considerably low. Only home equity loans with a fixed rate can have a slightly higher interest. Home equity loans with a variable rate usually carry a somewhat lower interest rate. Home equity lines of credit, on the other hand, carry only a variable interest rate that is usually similar to the home equity loan fixed interest rate.

Loan amount

Home equity loans come with a fixed loan amount that can equal or be a bit higher than the home equity value. Home equity lines of credit are somewhat different: There is no loan amount, a credit maximum amount is set and you can borrow as much money as you need up to that amount. For example: If a $50.000 limit is set you could borrow $10.000 and a month later borrow $20.000 more. And so on till you reach the credit maximum.

Repayment
Home equity loans come with a fixed repayment schedule which has to be followed strictly with some exceptions. Though, there are in some cases grace periods and waivers you could apply for, if you request a home equity loan you will probably have rigid installments or at least a fixed amount plus a variable amount depending on interest rate variations.

Home equity lines of credit let you repay the amount you owe they way you want to do it. You have an open line of credit where you can borrow and repay as much as you want as long as you do not exceed the credit limit. Moreover, as opposed to home equity loans, lines of credit do not require to be renewed as you can always borrow more as long as there is credit left. If your home equity grows either by an increase on your property value or because of a reduction on your mortgage debt, you can ask for your credit maximum to be recalculated.

Read more: http://www.articlesbase.com/credit-articles/the-flexibility-you-need-benefits-of-home-equity-lines-of-credit-279295.html#ixzz0peKezPxB
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Dazed and Confused: What Kind of Private Mortgage Insurance (pmi) Should You Choose?

So, you’re putting less than a 20% down payment on the house you are buying and you are getting a conventional loan. Your lender has given you the option of paying a monthly private mortgage insurance (PMI) premium or offering you a higher rate where the lender pays it, known as lender paid mortgage insurance (LPMI). Which scenario is better for you? You’re confused and don’t really understand it all; you’d prefer to just have the decision made for you rather than weigh the options yourself. However, if you don’t consider all the options, you could be making a financial mistake.

PMI protects the lender against default and is required on loans that are deemed higher risk If you are investing less than 20% of your own money into a home, a lender considers it easier for you to walk away from your debt obligation if you find yourself in a pickle and can’t pay your mortgage. Your lender can buy/pay your mortgage insurance for you, but to do so, they charge you a higher rate plus a profit margin. To make a decision as to which route to take, you need to weigh the pros and cons.

You have more interest to deduct on your taxes because of your higher rate when you have LPMI. But if you and your spouse make $100,000 annually or less, or individually you make $50,000 annually, your monthly mortgage insurance is deductible. Depending on your tax bracket, the higher interest rate may or may not benefit you. You should crunch the numbers or ask your accountant’s advice.

PMI automatically terminates when your loan to value (of the original property value) reaches 78%, and but you can request it terminated when it reaches 80%. Some lenders will allow you to terminate the insurance when the appreciated loan to value reaches 80%. So, how long are you keeping this loan? Will you be paying down the principal balance rapidly? Is this your forever home and your forever mortgage rate? Then perhaps LPMI isn’t such a hot option. You can review an amortization schedule when making this decision to figure out just what payment will get you to that target loan to value (LTV). If you know that you will be making extra principal payments regularly, your lender should be able to help you analyze that scenario as well. However, if you’re going to be in the house a short time, than LPMI might just be the way to go.

Finally, just look at your basic payment both ways. Which way is more affordable for your current needs? The pricing on these products fluctuates. One product may be cheaper than another based on loan amount, term, down payment and other factors. You may also qualify for a second mortgage to make up the remaining 20% down payment and avoid private mortgage insurance altogether. What works best for your needs?

When considering your options, discuss your plans with your lender. Consider the above points and discuss them with her/him. By doing so, you should be able to clear the fog and make an educated decision.

 

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