What is a Mortgage?
A mortgage is the transfer of an interest in property (or the equivalent in law – a charge) to a lender as a security for a debt – usually a loan of money. A mortgage represents a loan or lien on a property/house that has to be paid over a specified period of time. Think of it as your personal guarantee that you’ll repay the money you’ve borrowed to buy your home. Mortgages come in many different shapes and sizes, each with its own advantages and disadvantages. Make sure you select the mortgage that is right for you, your future plans, and your financial picture.While a mortgage in itself is not a debt, it is the lender’s security for a debt. It is a transfer of an interest in land (or the equivalent) from the owner to the mortgage lender, on the condition that this interest will be returned to the owner when the terms of the mortgage have been satisfied or performed. In other words, the mortgage is a security for the loan that the lender makes to the borrower.
Mortgages come in two primary forms, fixed rate and adjustable rate, with some hybrid combinations and multiple derivatives of each. A basic understanding of interest rates and the economic influences that determine the future course of interest rates can help consumers make financially sound mortgage decisions, such as making the choice between a fixed-rate mortgage or adjustable-rate mortgage (ARM) or deciding whether to refinance out of an adjustable-rate mortgage.
The Mortgage Production Line
The mortgage industry has three primary parts or businesses: the mortgage originator, the aggregator and the investor.
The mortgage originator is the lender. Mortgage originators introduce and market loans to consumers. They sell loans. They compete with each other based on the interest rates, fees and service levels that they offer to consumers. The interest rates and fees they charge consumers determine their profit margins.
The aggregator buys newly originated mortgages from other institutions. They are part of the secondary mortgage market. Most aggregators are also mortgage originators. Mortgage-backed securities are sold to investors.
Fixed Interest Rate Mortgages
The interest rate on a fixed-rate mortgage is fixed for the life of the mortgage. However, on average, 30-year fixed-rate mortgages have a lifespan of only about seven years. This is because homeowners frequently move or refinance their mortgages.
The Federal Reserve plays a large role in inflation expectations. This is because the bond market’s perception of how well the Federal Reserve is controlling inflation through the administration of short-term interest rates determines longer-term interest rates, such as the yield of the U.S.
Concluding Tips
An understanding of what influences current and future fixed- and adjustable-rate mortgage rates can help you make financially sound mortgage decisions. This knowledge can help you make a decision about choosing an adjustable-rate mortgage over a fixed-rate mortgage and can help you decide when it makes sense to refinance out of an adjustable rate mortgage.