Mortgage Interest Rate

Mortgage Interest Rate can be defined as interest rate on mortgaged properties generally advanced to secure a loan. Mortgage is theoretically defined as a conditional or temporary pledge of a property as a security for the performance of an obligation or repayment of a debt.

Mortgage Interest Rate can be defined as interest rate on mortgaged properties generally advanced to secure a loan. Mortgage is theoretically defined as a conditional or temporary pledge of a property as a security for the performance of an obligation or repayment of a debt.

Mortgaged properties forwarded as collateral to secure loans are usually real estate, which includes both commercial and residential properties. Personal properties (called chattels) are also used as collateral for mortgage. Residential property mortgages come across in the form of home mortgages or home loans and mortgages against commercial properties are known as commercial mortgages. Interest rates on mortgages differ according to the nature of the mortgage. Interest rates on home mortgages are lower than those on commercial mortgages.

Mortgage in terms of investment analysis is known as a debt instrument, which is secured by specified real estate property, that the borrower is required to pay back with regular loan amortizations. Loan amortizations are defined as regular loan repayments in a monthly or annualized basis. Mortgage interest rate or mortgage rates may have long loan amortization periods but the total interest payments accruing on the mortgage loan will be higher. Commercial mortgage interest rates carry higher interest rates due to the non-recourse nature of the mortgage; i.e. upon default of payment on the loan amount, the rights of the creditor is only limited to the value of the collateral which are usually partnership firms or limited companies.

If the sale proceeds are less than the amount of the outstanding loan balance on the commercial mortgage, the creditor has to pay out the remaining amount. Due to long repayment periods, large capital expenditures and uncertain future revenue streams, usually about 80% of the loan-to-value ratio is advanced as commercial mortgage, which can provide a much needed cushion. In case of home loans, mortgage interest rates are usually lower due to the certainty of its repayment and the possibility of foreclosure or repossession by the creditor to realize the full amount of sale proceeds. Usually, up to 100% of the loan-to-value ratio is extended in the form of home loans.

Mortgage interest rates are determined by various factors such as the credit worthiness of the borrower, the tenure of the mortgage loan, and the nature of the loan, the loan amount and the purpose of the mortgage loan.

Mortgage interest rates are basically fixed or floating in nature. Fixed Mortgage Rates mean that mortgage rates are fixed for the entire life of the loan whereas floating mortgage rates change with the market situation.

Adjusted Rate Mortgages (ARM) are usually about 1% or 0.5% lower initially than Fixed Rate Mortgages (FRM) in case of the USA but follow the volatility of market indices and require a balloon payment at the end of the mortgage loan tenure. ARM is generally attached is 11th District Cost of Funds Index (COFI), London Interbank Offered Rate (LIBOR), 12th Month Treasury Average Index (MTA) and the National Average Contract Mortgage Rate.

Indices are generally applied on a rate plus margin basis with the margin remaining fixed over the life of the loan. Average countrywide ARM and FRM rates have fallen hovering around 5.77% and 5.5% for 30 year and 15 year fixed rates respectively; 1 year ARM and 5/1 ARM rates are 5.43% and 5.9 % respectively. 30 year fixed jumbo mortgage rates however hover around 6% in the country and that for 15 year fixed jumbo is 5.7%.

FRM interest rates are fixed at a little bit higher than 30-year treasury bonds in case of the USA. The borrower is required to pay the interest on the mortgage or the mortgage rate and a little bit of the principal with the interest on the principal falling over time. In contrast, the ARM mortgage rate may change in response to the Treasury bill rate or the Prime Rate. In this context, prime rates are defined as the lowest interest rates offered by a loan provider to its most preferred borrower. In case of India, these terminologies vary between fixed or floating interest rates. Home loans, which has experienced tremendous growth in the past few years, has been the factor behind the rise of mortgage financing industry in India. Interest rates on home mortgages vary between 12.5% and 16% for housing loans for periods of 15 years or more. In some cases though, mortgage tenures can extend up to 20 years or more.

Interest rates on mortgages can be readily influenced by the government monetary and fiscal policy. Mortgage rates, either very high or low, depend on the market pressures as investors may take money out of mortgage funds or may reinvest in them. The Federal Bank’s (of the USA) decision to raise short-term interest rates has influenced the mortgage interest rates readily. The Australian government is also planning to keep the mortgage rates in its latest budget steady, as it had been around 8% in the recent years. In case of England, mortgage rates have been rising above 5.25% in the wake of tight mortgage approvals ever since the Bank of England gained independent control over the monetary policy in 1997.