Understanding Mortgage
Understanding Mortgage
by terrence turner
Mortgage prepayments are most often made because a home is sold or because the homeowner is refinancing to a new mortgage, presumably with a lower rate or shorter term. Mortgages employ due-on-sale and due-on-encumbrance clauses to prevent the transfer of mortgages. Mortgages are regulated by federal or state law or agencies depending on under whose law they were chartered or established.
Interest
Interest rates can fluctuate, based upon the decisions of the Federal Reserve Board. An interest-only mortgage provides flexibility to the borrower in the early years of the loan. The properties of these loans vary, with longer-term loans (5 years or longer) often being at fixed interest rates and having restrictions on prepayment, while shorter-term loans (1-3 years) are usually at variable rates and freely pre payable. One reason for this phenomenon is that homeowners can refinance at a lower fixed interest rate.
There are other drivers of the prepayment function (or prepayment risk), independent of the interest rate, for instance: Economic growth, which is correlated with increased turnover in the housing market Home prices inflation Unemployment Regulatory risk; if borrowing requirements or tax laws in a country change this can change the market profoundly. Stripped mortgage-backed securities (SMBS): Each mortgage payment is partly used to pay down the loans principal and partly used to pay the interest on it. Paying points will reduce the interest rate and your monthly payments. If the originator keeps the loan, it makes money by way of the interest you pay each month. This drives mortgage interest rates up, because lenders cannot sell their loans at lower yields.
Credit
The credit risk of mortgage-backed securities depends on the likelihood of the borrower paying the promised cash flows (principal and interest) on time. Although the risk neutral credit spread is theoretically identical between a mortgage ensemble and the average mortgage within it, the chance of catastrophic loss is reduced. Mortgage company stocks should react positively to a rate cut by the Federal Reserve, but it will be short-lived because rising credit costs and a “tougher origination environment” will be drag on earnings, according to a Friedman Billings Ramsey report.
Regardless of your credit history, you owe it to yourself to talk to a mortgage professional that will work to get you the best possible loan at the best available interest rate, in the shortest amount of time. The rate you pay is customarily based upon the prevailing interest rate, along with other considerations such as the amount of your down payment and your personal credit rating.
A mortgage-backed security (MBS) is an asset-backed security whose cash flows are backed by the principal and interest payments of a set of mortgage loans. When a mortgage refinances or the borrower prepays during the month, the prepayment measurement increases. There are many reasons for mortgage originators to finance their activities by issuing mortgage-backed securities. The credit risk of mortgage-backed securities depends on the likelihood of the borrower paying the promised cash flows (principal and interest) on time.
Terrence Turner is a successful Webmaster and publisher of www.ExpertsOnMortgaging.com. He provides more information about mortgage and mortgaging issues that you can research in your pajamas on his website.
Tags: Mortgage
No related posts.