With so much interest rate uncertainty in the market borrowers are facing a dilemma as to whether they should fix their home loan interest rate or not by applying for a fixed rate mortgage. A Montreal fixed rate mortgage will provide absolute security against interest rate rises ensuring that monthly repayments remain constant regardless of what the money market is doing.
The interest rate, and therefore the interest payments, on the fixed rate product will remain stable for the fixed rate period. This period is predetermined and is usually set between one and five years, although it can be for longer.
Fixing home loan repayments can help considerably with household budgeting which is why this type of product is popular with low income earners and first-time-buyers. Montreal Mortgage payments usually account for about a third of a household’s disposable income so it is important to ensure that rising interest rates do not make the home loan unaffordable. Locking in the interest rate at an acceptable level can reduce this risk considerably.
Borrowers should be aware, however, that fixed interest rates are usually higher than variable rates offered on the same products. Additionally, as a general rule, the longer the fixed rate period is, the higher the interest rate will be. This is because lenders must provide themselves with a profit margin on the money they lend. If they are expecting interest rates to increase in the future, their costs will increase and their profit margin will decrease.
Lenders therefore need to build in a larger profit margin for this type of home loan product when compared to variable rate products. Mortgage products that have a variable interest rate should provide a profit to the lender for the entire term of the loan. Borrowers should therefore keep in mind that they might pay over the odds for a fixed rate home loan however the reduction in risk should make up for this.
Another factor that borrowers should consider before applying for a home loan product of this kind is early repayment charges and arrangement fees. Although a fixed rate mortgage can save money over the long term if interest rates rise, borrowers should take into account any fees that may be payable on an existing home loan if it is redeemed and switched to a new product.
Additionally, fixed rate products may attract an arrangement fee. The cost of the arrangement fee should also be taken into account when calculating whether this type of home loan product is worth applying for. Also, home loan products typically come with early repayment charges during the fixed rate period. This means that if the borrower wishes to redeem the loan or remortgage to another product they will have to pay a fee to the lender. Early repayment charges can be as high as five percent of the balance of the loan.
If you are unsure on whether you should apply for a fixed rate home loan, contact a qualified independent financial advisor for expert advice. An independent advisor will be able to assess you borrowing needs and suggest the most appropriate mortgage products for you to consider for your home.
Showing posts with label bank loan. Show all posts
Showing posts with label bank loan. Show all posts
Wednesday, July 9, 2008
Tuesday, June 10, 2008
Types of Interest on a Mortgage
One of the most confusing parts of getting a mortgage in Montreal and buying your own home can be the interest rates. From the myriad of choices available to how the interest is actually worked our, it can quickly become confusing if you’re not sure what it all means. However, understanding what each type of interest means can help you make the right decision when it comes to choosing the mortgage you want to go with.
Variable Rate
This is one of the most common mortgages in Montreal and probably the one that people relate to the most. It simply means that your monthly payments will be dictated by whatever the current interest rates are – so, if the housing market is good, you’ll probably see your monthly payments rise, whereas if the market’s in a slump, your interest rates and payments will be lower.
Tracker Rate ( just for UK )
Similar to a variable mortgage but with one big difference – the interest rate is tied directly to the Bank of England, so whatever decisions are made there, you’ll find your interest rate is slightly above or slightly below, dependent on current rates.
Fixed Rate
The other most popular type of mortgage, since this keeps your interest rate fixed for a set period of time (usually between 2-5 years). This ensures that you know exactly what you’re paying month in and month out. Of course, the downside to this type of mortgage is that if bank rates fall, you won’t benefit from the lower mortgage payments that people on variable rates will enjoy. You’re also usually penalised if you decide to switch lenders throughout your mortgage term, often as much as 3-4 months worth of interest.
Capped Mortgage ( mostly UK )
Often seen as a mix of variable and fixed rate, a capped mortgage means that your interest rate will only go so high for a set amount of time. So, if your cap is 10% and the housing market crashes through to 10½% or more, you won’t pay the extra rates. However, there’s the added bonus that if the interest rates fall, you’ll make the savings that a variable rate mortgage would give you.
Discount Mortgage
Just as it suggests, this will offer you a discount on your variable interest rate for the first couple of years on your mortgage. However, although it helps reduce your early monthly payments, you still pay the same overall amount that you would if you take out a standard mortgage.
Cashback Mortgage
Excellent for the first time buyer especially, this offers you a cash rebate at the start of the mortgage, calculated as a percentage of your overall mortgage. You receive this cash instantly, and simply pay it back at the end of the mortgage. This is an ideal solution for anyone just starting out on the property ladder, or for anyone on a limited budget.
There are other types of mortgage as well as these ones, including current account mortgages and offset mortgages, which a specialist advisor would be able to discuss with you. Just knowing what’s available and whether it’s suitable for you or not can make a big difference in the long run.
Variable Rate
This is one of the most common mortgages in Montreal and probably the one that people relate to the most. It simply means that your monthly payments will be dictated by whatever the current interest rates are – so, if the housing market is good, you’ll probably see your monthly payments rise, whereas if the market’s in a slump, your interest rates and payments will be lower.
Tracker Rate ( just for UK )
Similar to a variable mortgage but with one big difference – the interest rate is tied directly to the Bank of England, so whatever decisions are made there, you’ll find your interest rate is slightly above or slightly below, dependent on current rates.
Fixed Rate
The other most popular type of mortgage, since this keeps your interest rate fixed for a set period of time (usually between 2-5 years). This ensures that you know exactly what you’re paying month in and month out. Of course, the downside to this type of mortgage is that if bank rates fall, you won’t benefit from the lower mortgage payments that people on variable rates will enjoy. You’re also usually penalised if you decide to switch lenders throughout your mortgage term, often as much as 3-4 months worth of interest.
Capped Mortgage ( mostly UK )
Often seen as a mix of variable and fixed rate, a capped mortgage means that your interest rate will only go so high for a set amount of time. So, if your cap is 10% and the housing market crashes through to 10½% or more, you won’t pay the extra rates. However, there’s the added bonus that if the interest rates fall, you’ll make the savings that a variable rate mortgage would give you.
Discount Mortgage
Just as it suggests, this will offer you a discount on your variable interest rate for the first couple of years on your mortgage. However, although it helps reduce your early monthly payments, you still pay the same overall amount that you would if you take out a standard mortgage.
Cashback Mortgage
Excellent for the first time buyer especially, this offers you a cash rebate at the start of the mortgage, calculated as a percentage of your overall mortgage. You receive this cash instantly, and simply pay it back at the end of the mortgage. This is an ideal solution for anyone just starting out on the property ladder, or for anyone on a limited budget.
There are other types of mortgage as well as these ones, including current account mortgages and offset mortgages, which a specialist advisor would be able to discuss with you. Just knowing what’s available and whether it’s suitable for you or not can make a big difference in the long run.
Sunday, April 13, 2008
Appraisals-Truth About Mortgage Property
Here is the cold, hard truth on valuations and what appraisers will NEVER tell you. Keep these points in mind on every loan you do.
1. Cosmetic stuff such as paint, new carpets, window treatments, etc. do not increase appraised value, they only increase the perceived value of the property from the viewpoint of the buyer. Yes, cosmetics will affect your asking price and what the buyer is willing to pay, but it will NOT increase the intrinsic value of the house on the appraisal report. It also won’t get a customer out of PMI if you try to refinance him and all he has done to improve the property is wallpaper and paint. Lenders are much savvier than this and (if the time period has only been a year or two and prices haven’t increased) will require “significant” property upgrades to kick off PMI, not just cosmetic effects. Remember this.
2. Also, high end appliances such as sub-zero freezers and granite counter top upgrades do nothing to increase value on the actual appraisal report. And even if by chance they do, it will be very, very low and insignificant. Yes, some appraisers will try to tell you that they took the upgrades into account when determining value, when the real reason is they didn’t. Appraisers just say that, because it’s the borrowers who belly ache with “well I put all this work into the house, and surely my shiny new stailess steel appliances added some value, didn’t they....
3. On condo’s, the appraiser must first look within the same complex development for comparable properties BEFORE looking elsewhere to justify a value. That’s because lenders want to know what other units next to it have sold for, and most likely, these units are all similar in nature and have a common historical precedence for valuation.
4. If the appraiser goes outside the normal mileage boundaries of the area to search for comparable properties, there must be a valid and overriding reason given. And this reason must be CLEARLY articulated and stated on the appraisal report. Failure to do this and you risk having the appraisal report kicked back to you from underwriting and requesting additional comparables. (This delays the closing, risks your interest rate lock and may even kill the whole deal!)
5. Carefully watch your hits and adjustments on the rate sheet and beware of pricing bumps because of a low appraisal. If the “loan to value” on the property is too high and the customer is taking cash-out, then this WILL affect the interest rate and--more importantly--your income! On the other hand, if the appraisal comes in higher making the “loan to value” lower, you can either keep the extra yield spread you earn or pass the savings onto the customer and lower their interest rate or reduce some of the closing costs. If you do nothing, you can simply use this additional “found capital” as additional leverage to make yourself more competitive with the borrower. As the deal progresses, you may have to bargain and cut your fees to save the loan. Keeping a bit of padding, gives you a way to make amends without losing your shirt!
6. Keep in mind that appraisal values are a moving target and that the appraiser can only go back so far to pull out comparable properties, typically no more than 3 to 4 months. Anything longer and the bank will condition you for it and ask for more comps. Again, you don’t want to delay the closing and risk losing your commission.
7. Any value that is given to a home is only as good as the value of the other properties surrounding it. If the market is in a downward trend (as we are today), then the prevailing prices will be downward. Duh?! Customers don’t like to hear this. Everyone thinks they are sitting on a “goldmine” and I can’t even tell you how many BBQ’s I’ve been at where so-and-so is bragging about how much their house is worth. You can imagine the shock on their face when they try to refinance and get the appraisal report. That alone is enough to deflate their enthusiasm. Sorry to spoil the party, Mr. Customer, but all value is subjective and only as good as what someone else is willing to pay.
8. Tell customers, that no matter what the property value comes in at, you have absolutely no control over it. Appraisers are independent third parties and their opinion is usually firm. They are bound by legal, ethical and moral obligations and could lose their license if they stray too far beyond the guidelines. They could lose their job!!!
9. If customers doubt the appraised value and think it should be higher (again the goldmine mentality), tell them that it is up to them to get a second opinion if they choose too. However, be sure to tell them that it will cost them another appraisal fee (this usually is enough to stop them cold in their tracks!). Reiterate the points mentioned above. You are acting as their trusted advisor so they should heed your advice.
10. As a last resort, you could call the appraiser and see if they may have overlooked something on the report such as significant upgrades (meaning finished basements, porches, attics, additional rooms, etc.) Also, are there any other recent sales in the area that you know of? Could the appraiser use one of those comparable properties instead? Maybe this will help you get to the value you are looking for. Maybe not.
Remember when working on loans you need to set expectations with the borrower. I always tell customers that no matter what they “think” the property is worth we actually have no idea until an independent third party takes an objective look at it. It’s no use trying to guess and speculate!
When someone tells me the value of their home I take it with a grain of salt because I know that most likely the appraisal will come in far less than they think…and I price my loans accordingly. I suggest you do the same. Listen to your gut instinct and never just take the borrowers word for it.
I hope the above tips regarding appraisals help you in this ever changing market. If you want to survive you’ll need to adapt and become your customer’s best friend. The better educated you are about the mortgage process, the less fall-out you’ll have and the more loans you’ll ultimately close.
1. Cosmetic stuff such as paint, new carpets, window treatments, etc. do not increase appraised value, they only increase the perceived value of the property from the viewpoint of the buyer. Yes, cosmetics will affect your asking price and what the buyer is willing to pay, but it will NOT increase the intrinsic value of the house on the appraisal report. It also won’t get a customer out of PMI if you try to refinance him and all he has done to improve the property is wallpaper and paint. Lenders are much savvier than this and (if the time period has only been a year or two and prices haven’t increased) will require “significant” property upgrades to kick off PMI, not just cosmetic effects. Remember this.
2. Also, high end appliances such as sub-zero freezers and granite counter top upgrades do nothing to increase value on the actual appraisal report. And even if by chance they do, it will be very, very low and insignificant. Yes, some appraisers will try to tell you that they took the upgrades into account when determining value, when the real reason is they didn’t. Appraisers just say that, because it’s the borrowers who belly ache with “well I put all this work into the house, and surely my shiny new stailess steel appliances added some value, didn’t they....
3. On condo’s, the appraiser must first look within the same complex development for comparable properties BEFORE looking elsewhere to justify a value. That’s because lenders want to know what other units next to it have sold for, and most likely, these units are all similar in nature and have a common historical precedence for valuation.
4. If the appraiser goes outside the normal mileage boundaries of the area to search for comparable properties, there must be a valid and overriding reason given. And this reason must be CLEARLY articulated and stated on the appraisal report. Failure to do this and you risk having the appraisal report kicked back to you from underwriting and requesting additional comparables. (This delays the closing, risks your interest rate lock and may even kill the whole deal!)
5. Carefully watch your hits and adjustments on the rate sheet and beware of pricing bumps because of a low appraisal. If the “loan to value” on the property is too high and the customer is taking cash-out, then this WILL affect the interest rate and--more importantly--your income! On the other hand, if the appraisal comes in higher making the “loan to value” lower, you can either keep the extra yield spread you earn or pass the savings onto the customer and lower their interest rate or reduce some of the closing costs. If you do nothing, you can simply use this additional “found capital” as additional leverage to make yourself more competitive with the borrower. As the deal progresses, you may have to bargain and cut your fees to save the loan. Keeping a bit of padding, gives you a way to make amends without losing your shirt!
6. Keep in mind that appraisal values are a moving target and that the appraiser can only go back so far to pull out comparable properties, typically no more than 3 to 4 months. Anything longer and the bank will condition you for it and ask for more comps. Again, you don’t want to delay the closing and risk losing your commission.
7. Any value that is given to a home is only as good as the value of the other properties surrounding it. If the market is in a downward trend (as we are today), then the prevailing prices will be downward. Duh?! Customers don’t like to hear this. Everyone thinks they are sitting on a “goldmine” and I can’t even tell you how many BBQ’s I’ve been at where so-and-so is bragging about how much their house is worth. You can imagine the shock on their face when they try to refinance and get the appraisal report. That alone is enough to deflate their enthusiasm. Sorry to spoil the party, Mr. Customer, but all value is subjective and only as good as what someone else is willing to pay.
8. Tell customers, that no matter what the property value comes in at, you have absolutely no control over it. Appraisers are independent third parties and their opinion is usually firm. They are bound by legal, ethical and moral obligations and could lose their license if they stray too far beyond the guidelines. They could lose their job!!!
9. If customers doubt the appraised value and think it should be higher (again the goldmine mentality), tell them that it is up to them to get a second opinion if they choose too. However, be sure to tell them that it will cost them another appraisal fee (this usually is enough to stop them cold in their tracks!). Reiterate the points mentioned above. You are acting as their trusted advisor so they should heed your advice.
10. As a last resort, you could call the appraiser and see if they may have overlooked something on the report such as significant upgrades (meaning finished basements, porches, attics, additional rooms, etc.) Also, are there any other recent sales in the area that you know of? Could the appraiser use one of those comparable properties instead? Maybe this will help you get to the value you are looking for. Maybe not.
Remember when working on loans you need to set expectations with the borrower. I always tell customers that no matter what they “think” the property is worth we actually have no idea until an independent third party takes an objective look at it. It’s no use trying to guess and speculate!
When someone tells me the value of their home I take it with a grain of salt because I know that most likely the appraisal will come in far less than they think…and I price my loans accordingly. I suggest you do the same. Listen to your gut instinct and never just take the borrowers word for it.
I hope the above tips regarding appraisals help you in this ever changing market. If you want to survive you’ll need to adapt and become your customer’s best friend. The better educated you are about the mortgage process, the less fall-out you’ll have and the more loans you’ll ultimately close.
Friday, April 4, 2008
Mortgage Loan
A mortgage loan is a loan secured by real property through the use of a mortgage (a legal instrument). However, the word mortgage alone, in everyday usage, is most often used to mean mortgage loan. A home buyer or builder can obtain financing (a loan) either to purchase or secured against the property from a financial institution, such as a bank, either directly or indirectly through intermediaries.
Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off the loan, and other characteristics can vary considerably.According to Anglo-American property law, a mortgage occurs when an owner (usually of a fee simple interest in realty) pledges his interest as security or collateral for a loan. Therefore, a mortgage is an encumbrance on property just as an easement would be, but because most mortgages occur as a condition for new loan money, the word mortgage has become the generic term for a loan secured by such real property.
As with other types of loans, mortgages have an interest rate and are scheduled to amortize over a set period of time; typically 25, 30 and in recent years 40 years. All types of real property can, and usually are, secured with a mortgage and bear an interest rate that is supposed to reflect the lender's risk.
Governments usually regulate many aspects of mortgage lending, either directly (through legal requirements, for example) or indirectly (through regulation of the participants or the financial markets, such as the banking industry), and often through state intervention (direct lending by the government, by state-owned banks, or sponsorship of various entities). Other aspects that define a specific mortgage market may be regional, historical, or driven by specific characteristics of the legal or financial system.
Mortgage loans are generally structured as long-term loans, the periodic payments for which are similar to an annuity and calculated according to the time value of money formula. The most basic arrangement would require a fixed monthly payment over a period of ten to thirty years, depending on local conditions. Over this period the principal component of the loan (the original loan) would be slowly paid down through amortization. In practice, many variants are possible and common worldwide and within each country.
There are many types of mortgages used worldwide, but several factors broadly define the characteristics of the mortgage. All of these may be subject to local regulation and legal requirements.
Interest: interest may be fixed for the life of the loan or variable, and change at certain pre-defined periods; the interest rate can also, of course, be higher or lower.Term: mortgage loans generally have a maximum term, that is, the number of years after which an amortizing loan will be repaid. Some mortgage loans may have no amortization, or require full repayment of any remaining balance at a certain date, or even negative amortization.Payment amount and frequency: the amount paid per period and the frequency of payments; in some cases, the amount paid per period may change or the borrower may have the option to increase or decrease the amount paid.
Prepayment: some types of mortgages may limit or restrict prepayment of all or a portion of the loan, or require payment of a penalty to the lender for prepayment.The two basic types of amortized loans are the fixed rate mortgage (FRM) and adjustable rate mortgage (ARM) (also known as a floating rate or variable rate mortgage). In many countries, floating rate mortgages are the norm and will simply be referred to as mortgages; in the United States, fixed rate mortgages are typically considered "standard." Combinations of fixed and floating rate are also common, whereby a mortgage loan will have a fixed rate for some period, and vary after the end of that period.
In a fixed rate mortgage, the interest rate, and hence periodic payment, remains fixed for the life (or term) of the loan. In the Canada the term is usually up to 40 years (25 and 30 being the most common), although longer terms may be offered in certain circumstances. For a fixed rate mortgage, payments for principal and interest should not change over the life of the loan, although ancillary costs (such as property taxes and insurance) can and do change.
In an adjustable rate mortgage, the interest rate is generally fixed for a period of time, after which it will periodically (for example, annually or monthly) adjust up or down to some market index.
Common indices in the Canada include the Prime Rate, the London Interbank Offered Rate (LIBOR), and the Treasury Index ("T-Bill"); other indices are in use but are less popular. Adjustable rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where fixed rate funding is difficult to obtain or prohibitively expensive. Since the risk is transferred to the borrower, the initial interest rate may be from 0.5% to 2% lower than the average 30-year fixed rate; the size of the price differential will be related to debt market conditions, including the yield curve.
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