Fixed Mortgage Basics: Fundamentals of Fixed Interest Rates

A fixed mortgage is one whose interest rate remains the same over the full term of the mortgage loan. This   contrasts with an adjustable rate mortgage, where the interest rate can fluctuate with market conditions after a specified period of time. A fixed interest rate is easier to understand, and many prefer the predictability of repayments, and the way they have more disposable income as their income increases but mortgage repayments do not.

Benefits of a Fixed Mortgage

If you are seeking stability, and the safety of knowing exactly what you will be paying every month, then this is for you. This type of mortgage enables you plan ahead with confidence, without the possibility of facing a sudden hike in your monthly repayments because interest rates suddenly increase.

When you decide on a fixed mortgage, your choice of lender or building society will make little difference to your monthly payments because all offer very similar fixed interest rates. However, where interest rates do vary between lenders, you have the advantage of knowing that when you select the lowest rate, it will not change over the period of the mortgage.

While the rate for a fixed mortgage will be higher than the initial rate for an adjustable rate mortgage, if you take your mortgage on at a period when interest rates in general are low, then you could get a good deal for the entire life of the mortgage.

Disadvantages of Fixed Interest Mortgages

One of the disadvantages of fixed interest loans in general is that you are limited in how much you can borrow. This is particularly true when interest rates are generally high: the amount of your mortgage depends on your ability to repay, and you are liable to be restricted in the size of home you can purchase, even with a 30-year loan.

Also, if interest rates fall back to lower levels, your mortgage rate will not fall with them. You are locked into a fixed interest mortgage, and might face penalty charges if you attempt to repay it early (prepayment penalty). This is a something you should establish prior to signing for the mortgage loan.

The term of the loan could make a difference, and here are the pros and cons of 15-year and 30-year mortgages with fixed interest rates

15 Year Fixed Rate Mortgages

Benefits:

  • Because the amortization is over a shorter period, you can increase equity over a shorter period of time. This enables you to purchase upwards at a faster rate than if you were paying a 30 year mortgage, or to repay your mortgage sooner.
  • The interest rate will be lower than that for a corresponding 30 year fixed rate mortgage.
  • The total amount you pay the lender in interest will be lower and so more of your cash will be going to repay the capital.

Disadvantages:

  • The monthly payments will be significantly greater for a 15-year fixed rate mortgage than if you repaid the loan over 30 years. That is because you are repaying more of the capital sum, which has to be paid up in half the time.
  • Because your monthly repayments are higher, you might not be able to afford as large a house as you could purchase with a 30-year fixed interest mortgage.

30 Year Fixed Mortgage

Benefits:

  • You can take a mortgage over the longer term, knowing that your repayments will remain the same over 30 years, irrespective of the financial situation.
  • Interest is amortized over double the time period than a 15 year loan, so the monthly repayments will be smaller.
  • You will be paying more in interest overall with a 30-year fixed rate mortgage, so can claim more on your federal income tax returns.

Disadvantages:

  • The fixed interest rate will be set at a higher level than that for a 15 year mortgage.
  • Equity will build up very slowly in comparison to that of a 15 year fixed rate mortgage.
  • You will end up paying more in interest to the lender.

Even if they can easily afford a 15 year mortgage, many people choose to pay over 30 years, and invest what they save in monthly payments. This can give them a yield greater than the difference in the monthly payments. This will be particularly true for those that take the mortgage at a fixed rate when rates are generally low.

If it is necessary to take a mortgage at a time when rates are particularly high, many will choose the 15-year fixed mortgage or choose an adjustable rate mortgage instead. If you had arranged an adjustable rate mortgage when rates were high, you may consider trading it for a fixed-rate loan when mortgage interest rates have dropped. You will then benefit from the lower rate for the remainder of the mortgage term.

In general, then, a fixed mortgage offers the advantage of knowing exactly what your payments will be, irrespective of interest rate fluctuations. The major disadvantages are being unable to take advantage of interest rate drops, and a limitation in the mortgage amount, particularly when rates are high. If you have questions about fixed rate loans, I can help, simply contact me directly or request a rate request using the FREE rate request form above!

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Events effecting the Maine Mortgage Market 11.15 to 11.19

Mortgage bond prices were lower for last week pushing mortgage interest rates higher.  The Treasury auctions were mixed with generally decent foreign demand but rather lackluster overall results. The weekly jobless claims data came in lower than expected which was not bond friendly and pushed rates considerably higher Wednesday.  The bond market was closed Thursday for the holiday, which likely contributed to the volatility with thin trading conditions surrounding shortened trading week.  For the week interest rates finished worse by about 7/8 of a discount point.

The retail sales data Monday will set the tone for trading this week.  The inflation data on Tuesday and Wednesday have the greatest potential to move the financial markets.

LOOKING AHEAD – 11.15 to 11.19

Economic
Indicator
Release
Date & Time
Consensus
Estimate

Analysis
Retail Sales Monday, Nov. 15,
8:30 am, et
Up 0.6% Important.  A measure of consumer demand.  A smaller than expected increase may lead to lower mortgage rates.
Business Inventories Monday, Nov. 15,
10:00 am, et
Up 0.6% Low importance.  An indication of stored-up capacity.  A significantly larger increase may lead to lower rates.
Producer Price Index Tuesday, Nov. 16,
8:30 am, et
Up 0.7%,
Core up 0.1%
Important.  An indication of inflationary pressures at the producer level.  Weaker figures may lead to lower rates.
Industrial Production Tuesday, Nov. 16,
9:15 am, et
Up 0.3% Important.  A measure of manufacturing sector strength.  A lower than expected increase may lead to lower rates.
Capacity Utilization Tuesday, Nov. 16,
9:15 am, et
75% Important.  A figure above 85% is viewed as inflationary.  Weakness may lead to lower rates.
Consumer Price Index Wednesday, Nov. 17,
8:30 am, et
Up 0.3%,
Core up 0.1%
Important.  A measure of inflation at the consumer level.  Lower than expected increases may lead to lower rates.
Housing Starts Wednesday, Nov. 17,
8:30 am, et
605k Important.  A measure of housing sector strength.  Larger than expected decreases may lead to lower rates.
Leading Economic Indicators Thursday, Nov. 18,
10:00 am, et
Up 0.5% Important.  An indication of future economic activity.  A smaller increase may lead to lower rates.
Philadelphia Fed Survey Thursday, Nov. 18,
10:00 am, et
2.0 Moderately important.  A survey of business conditions in the Northeast. Weakness may lead to lower rates.

Low Rates

Mortgage interest rates remain near historic lows.  Borrowers that choose to float in this environment expose themselves to an upside risk in mortgage interest rates.  The Fed has specifically stated, “Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability.”  This means the Fed believes inflation levels should increase.  Inflation, real or perceived, generally erodes the value of fixed income securities causing prices to fall and rates to rise.  If the Fed has its way it is very possible to see mortgage interest rates increase.  However, there are no certainties even with the Fed’s stated goals.  The Fed does not directly dictate mortgage interest rates but its activities have an indirect effect on rates.

Recent history attests to spikes and drops in rates on almost a weekly basis.  Last week was a prime example.  A cautious approach to interest rate exposure is prudent.

 

Maine Mortgage Market Update 11.04.2010

Mortgage bond prices remain stronger this morning erasing the losses from yesterday afternoon following the data this morning.

Preliminary Q3 productivity rose 1.9%, higher than the expected 1% increase.

Weekly jobless claims came in at 457k, higher than the expected 443k.

We still have the employment report looming tomorrow. There is more potential for wild market swings so be cautious.

A Look ahead at events that can effect Mortgage bond prices

Economic
Indicator
Release
Date & Time
Consensus
Estimate

Analysis
Existing Home Sales Monday, Oct. 25,
10:00 am, et
4.23m Low importance. An indication of mortgage credit demand. Significant weakness may lead to lower rates.
Consumer Confidence Tuesday, Oct. 26,
10:00 am, et
50 Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.
2-year Treasury Note Auction Tuesday, Oct. 26,
1:15 pm, et
None Important. $35 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
Durable Goods Orders Wednesday, Oct. 27,
8:30 am, et
Up 0.8% Important. An indication of the demand for “big ticket” items. Weakness may lead to lower rates.
New Home Sales Wednesday, Oct. 27,
10:00 am, et
300k Important. An indication of economic strength and credit demand. Weakness may lead to lower rates.
5-year Treasury Note Auction Wednesday, Oct. 27,
1:15 pm, et
None Important. $35 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
Q3 Advanced GDP Thursday, Oct. 28,
8:30 am, et
Up 2.4% Very important. The aggregate measure of US economic production. Weakness may lead to lower rates.
7-year Treasury Note Auction Thursday, Oct. 28,
1:15 pm, et
None Important. $29 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
Q3 Employment Cost Index Friday, Oct. 29,
8:30 am, et
Up 0.5% Very important. A measure of wage inflation. Weakness may lead to lower rates.
U of Michigan Consumer Sentiment Friday, Oct. 29,
10:00 am, et
68.5 Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.

Employment Cost Index

The employment cost index is a quarterly report issued by the Department of Labor. The report measures the growth of wages, salaries, and benefits costs over a certain period of time. Though ECI figures are usually weeks old, the data remains the best indicator of employment price pressures considering it factors employees’ total compensation.

If wage pressures become evident, higher expectations of inflation also tend to arise. However, increasing compensation does not necessarily lead to increased inflationary pressures. Oftentimes, increased productivity enables employers to increase compensation without increasing the costs of their goods or services. Be cautious heading into this release. 


 

 

Maine Mortgage Market Update 10.25.2010

Mortgage bond prices remain higher Monday morning erasing all the losses seen Friday afternoon and more. Trade is quiet.

In news released today, existing home sales stood at 4.53M. Traders were expecting sales to stand at 4.25M. That data was better than expected however it had little effect on trade.

With no more news set for release today, traders will watch stocks to help gauge interest rate direction. At pricing the DOW was higher by 96-points.

Mortgage Rates Rise on Treasury Bond yield

 

Today the yield on the 10 year Treasury Bond is up sharply over last week and Maine Mortgage Rates have come up with it. There was a weak 5 year auction yesterday (pushing yields higher) and there is a 10 year Treasury Bond auction today (pushing yields higher). Traders expect bond yields to retract as we approach the November Fed meeting and keep mortgage rates low.

I would recommend  floating any new mortgage applications and wait for pricing to improve. This also allows for your lender to lock at a much shorter rate lock period after receiving appraisal.  Contact your Maine Mortgage Broker or Banker for details and advice.

Maine Mortgage Rate Update for October 7,2010

Maine Mortgage Rate Update for October 7,2010

Today’s pricing* for Conventional and Government, FHA, Purchase loans:

Conventional with NO POINTS

Rate                 APR                 Term                Lock Period

4.125%            4.258%            30 year             45 days

3.875%            4.055%            20 year             45 days

3.75%              3.979%            15 year             45 days

Government FHA with NO POINTS

Rate                 APR                 Term                Lock Period

4.25%              4.674               30 year             45 days

3.75%              4.114               15 year             45 days

*Conventional rates based on a: $150,000 mortgage, 740 FICO, 80% LTV, 45% DTI, Owner occupied, Single Family residence, etc.. **Government rates based on a $150,000 mortgage, 660 FICO, 96.5% LTV (30 year), 90% LTV (15 year), 50% DTI, Owner occupied, Single Family or 1-4 multi-unit residence.

Contact your Maine Mortgage Banker and Broker at 888-775-4200 to lock in today!