Morgage Interest Rate Follows A Different Indicator

2007-03-08 10:33:40

( Technology )



Morgage interest rate is the rate you pay to your lenders for each period (usually one year) that you use their money, a loan which you have secured by your property (usually your home). With a morgage payment calculator, you use the morgage interest rate to figure out the amount of your monthly morgage payment.

The lower your morgage interest rate is, the lower your monthly morgage payment will be. When you're arranging for a mortgage, you should always try to negotiate for the lowest morgage interest rate. However, you must realize that you may not get the interest rates published in the media.

Those rates are based on many favorable assumptions: that the borrower has good credit, that monthly income is high enough to qualify, that there is full documentation for income and assets, and so on. If you cannot meet all the best-scenario assumptions, your morgage interest rate will be higher.

One major determinant of morgage interest rate is the efficiency of the housing system. In most respects, the US system has higher efficiency than in many other countries. As a consequence, morgage interest rates to prime borrowers in the US are only a point or so above long-term government bond yields.

Unlike before, however, mortgage markets of today are thoroughly integrated into the broader capital market, where investors buy mortgage-backed securities (MBS) at a certain yield. Most lenders now base their morgage interest rate to borrowers on MBS yields, and not on the Fed interest rate as most people think. So if you want to forecast morgage interest rate trends, you should follow movements in MBS yields.

Don't forget that morgage interest rate is different from annual percentage rate. The APR is the annual cost of your loan, including extra costs like fees and insurance; thus, it is usually slightly higher than your interest rate.


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