What Size of Mortgage Can You Afford?

couple in front of house

We’re here to help with all the technical details of a mortgage situation at Altius Mortgage and our partners at Mortgage Ogden, but that’s not all we do. Our mortgage brokers are also here to offer advice, opinions and expertise throughout the process, including areas you might be confused about.

One of the largest such areas many people need help with? Determining what sort of mortgage they can realistically afford for the future. Here are a few of the most important factors that will play a role in what sort of home loan you can afford.

Income Vs. Expenses

Within your finances, lenders are going to be looking at both your income and regular expenses. Income will be calculated as net, or on a post-tax basis. A vital factor is debt to income ratio – for many of the best mortgage rates and loan terms, lenders will require a ratio here that’s under 40 percent based on growth monthly income before taxes.

There are a few popular rules of thumb that come into play here when you’re searching for a new home. One states that you should never take on a mortgage for more than two and a half times your annual salary, for instance, and this can be a good baseline for many people.

Down Payment

Especially in recent years, down payment amounts have become a huge factor in mortgage situations. Coming up with a 20 percent down payment or more allows you to avoid private mortgage insurance in most cases, which can create a significant savings for you over the life of the mortgage.

Credit History

A credit report with any significant negative marks, such as late payments or defaults, could have a big impact on the loans that are right for you. Bad credit can cause mortgage rates to skyrocket, and will make you ineligible for certain kinds as well.

Want to learn more about the right kinds of loans for your financial situation? Our brokers are here to help. Contact us at Altius Mortgage today.

The Factors That Change ARM Rates

adjustable rate mortgage

For certain people, adjustable-rate mortgages are the preferred loan format. This is a format where mortgage rates can change through the life of the loan, and the number you’re repaying to mortgage lenders may change.

For people who stand to potentially benefit from the benefits of these kinds of loans (lower starting rates and requirements in many cases, for one), knowing which factors influence the adjustable mortgage rates in these loans is vital. Courtesy of Altius Mortgage and our partners at Mortgage Ogden, here are the basics on how changing mortgage rates are influenced.

Index

Also called reference rate, this is the average rate at which a given financial institution borrows unsecured funds. The index is the largest factor behind changes in interest rates for ARM loans. Different mortgages use different indexes – in the United States, these are the most common:

  • COFI: Short for 11th District Cost of Funds Index, this is based on reports from qualified member banks of the Federal Home Loan Bank of San Francisco. It’s updated once a month.
  • LIBOR: Short for London Interbank Offered Rate, this is updated daily and is used most commonly by private lenders.
  • MTA: This represents 120-month Treasury Average Index, and is based on a 12-month average of yields of securities issued by the US Treasury. This index is calculated monthly, and is considered very stable.
  • CMT: Or Constant Maturity Treasury, this is also based on the US Treasury yield, though it has to do with maturity dates on securities. CMT is more volatile than many others.
  • National Average Contract Mortgage Rate: An index based on the rates homebuyers paid if they bought within five working days of the end of the month. This is the traditional, most common index for ARM loans.

Index Caps

Because sharp rises could put people in a huge financial bind, index caps were created. These cap how much interest can change, either for the life of the loan or within a certain specific period. However, be aware that index caps only apply for interest – extra money above the cap is redistributed toward the balance, and can lead to higher monthly payments.

Margin

This is a fixed number that’s settled on before the loan. It’s not adjusted during the loan, so it lends some stability.

Discounts

In some cases, you can receive a discount for a year or two on your ARM. Speak to your broker about whether this is possible in your situation.

Want to learn more about mortgages, or any of our services? Speak to one of our mortgage brokers at Altius Mortgage today.

5 Factors That Help Determine Mortgage Rates

couple talking with loan officer

Perhaps the most important consideration out there when searching for a mortgage loan is mortgage rate. The interest rate you qualify for on a mortgage might be the single largest factor in determining whether the mortgage ends up being a positive or negative financial investment.

At Altius Mortgage Group, we’re dedicated to providing our clients with the best possible rates and resources for improving rate qualification. What are some of the most important factors that go into determining interest rates for a mortgage?

Credit Score

Credit score might be biggest individual factor in determining rates for mortgages. It’s as straightforward as possible here: A high credit score gives you a better chance at a low interest rate, where a low credit score likely limits you to pretty high rates in most cases. Proper attention to your credit and debt payments leading up to a mortgage application is vital.

Loan Size

In many cases, the higher the loan amount, the higher the interest rate. This is usually simply because lending a larger amount counts as larger risk for the lender, and they have to adjust accordingly. Especially for jumbo loans, which exceed typical maximum loan limits, expect higher standard rates.

Loan Type and Length

The way your loan is structured can also be a varying factor for interest rates. Adjustable-rate mortgages tend to have lower rates than fixed-rate mortgages given how much they can change over the years, and shorter loans may come with lower rates. If you can afford higher monthly payments, try to lower the length of your loan to 10- or 15-year terms to get a lower rate.

Down Payment

The more money you’re prepared to put down up front toward the loan, the better. Lenders will view a higher down payment as offsetting risk, and will generally make your interest rate lower. The threshold here is often 20 percent of the loan total, though if you can go even higher, that’s even better.

The Market

This is a broad factor that will be present no matter how organized or disorganized you are on the other elements we’ve mentioned. Mortgage rates in recent years have been relatively low, but this is always a factor that can change based on a number of exterior factors.

Have questions about this or any of our other mortgage services? Our expert mortgage brokers at Altius Mortgage are standing by.

Understanding ARMs

When securing a mortgage, one of your primary concerns should be what interest rate you’ll pay. Rates will often depend on the market conditions at the time you buy your home. If you want to avoid the stress that comes with following the rise and fall of interest rates, then you may want to play it safe and simply go with a fixed-rate mortgage. However, the peace-of-mind that comes with fixed rate loans may end up costing you more in interest over the life of your loan.

How Variable Rates are Determined

On the other hand, if you’re willing to take a gamble on interest rates falling the future, then you should give serious consideration to an adjustable-rate mortgage. Such a loan can secure you a lower initial rate right now, and then keep saving you money if rates happen to go down in the future. While interest rates may seem like such a volatile, unpredictable concept, the rate you end up paying with an ARM isn’t all that difficult to understand. It’s determined by combining the current market index (which is variable) with your preferred lenders margins (which are fixed). Index rates are maintained by third parties such as the London Inter-Bank Offer Rate (LIBOR) or the U.S. Treasury Bill (T-Bill) and can easily be found online or in financial publications.

Types of ARMs                                                                         

There are also different types of ARMs to choose from, each designed to help you manage your rate in a different way. These include:

  • 1-yr Treasury ARMs: The rates on these loans begin to adjust after your first year.
  • Convertible ARMs: A convertible ARM can be changed to fixed-rate loan after a certain period of time (essentially a less-expensive alternative to refinancing).
  • Intermediate ARMs: Often called hybrid ARMs, these loans follow a set schedule where your rate will be fixed before being adjusted annually. For example, your rate remains fixed for seven years with a 7/1 loan, then adjust annually every year thereafter.

In the end, there is always going to be an inherent risk that comes with ARMs. Just because the risk is there doesn’t that mean that it can’t be properly managed. If you have a trusted, reliable mortgage broker to help guide you in your decision-making, an ARM can help secure the home of your dreams while saving tens of thousands in interest. Let Altius Mortgage Group help you secure such services.

Why Does the Mortgage Interest Rate Fluctuate?

It can seem like the interest rates on your mortgage are determined by chance or some otherworldly power, but this is simply untrue. Analysts work hard to determine the cost of borrowing, and that information makes the services your mortgage company offers possible.  So what do mortgage companies look at when deciding what to charge for their money?

The 10 Year Treasury Bond Rule

The 10-year treasury bonds are the best indicator of fluctuations in mortgage rates. These investments are direct competitors for the same investment capital. Most mortgages are issued at 30-year amortization schedule but are usually paid off or refinanced every ten years. That means that an investor who places money in a mortgage is likely to see the maximum returns in about same period of time as that 10-year bond.

Investors put their money towards the investments that produce the most positive gain. When treasury bond rates increase, it means that lenders must charge a competitive interest rate to secure enough capital for mortgage loans and services.

The Money Supply

The amount of money in the economy has a direct impact on the cost of borrowing. When there is a lot of money and it is easy for banks to get, it makes it more difficult to earn profits from lending. They must lower the rates they charge for all loans. The lower rates encourage a higher volume of borrowing to make up the difference in profits. This is why governments often attempt to influence an economy with changes in monetary policy.

Market Conditions

Mortgages are a financial product. Like all other products and services, they are impacted by the laws of supply and demand.  A lender wants to work with stable borrowers and offers the rates that are competitive but profitable. When houses are in higher demand than supply, a higher mortgage rate is common. The opposite is true when there is surplus of housing.

Getting the best mortgage rate available helps you to afford a better home, but the timing is critical. Talk with your broker about your options.

3 Keys to Raising Your Credit Score and Lowering Your Mortgage Interest Rate

If you are thinking about buying a home soon, there is a single number that can play a huge role in your financial fate: your credit score. Credit scores are a rating that tells lenders about the potential risk of giving you money, using a scoring system from 300 to 800. Having an excellent credit score (defined as 720 and up) can provide you with the best rates and the lowest monthly payments, while scores under 620 make it extremely difficult to get approved for a loan with good terms.

There is no standard scale that defines how an interest rate changes based on your credit score, but generally speaking a difference of 100 to 120 points on your credit score could make a difference of 1.5 percent or more on your mortgage loan rate. If you’re borrowing $250,000 for a home, that’s $225 more on your monthly payment, and over the life of a 30-year loan you’ll pay over $80,000 more in interest with the lower credit score.

The keys to raising your credit score aren’t a mystery, but they do take some time, so here are three things you can start doing right now that will boost your score before you try to get approved for that loan.

Pay Down Credit Card Balances

Lenders look at the amount of revolving credit you have available and compare that to how much of it you’re using. If you have high balances on your credit cards, it will impact your credit rating, especially if your ratio of debt-to-available-credit is over 30 percent. Pay off credit cards, and stop charging things to your cards to keep those balances as low as possible. It’s also a good idea to keep any balances that you do have to one or two cards, rather than spreading out balances across many cards.

Don’t Take Out Other Large Loans

One of the factors that creditors use to evaluate your risk is the number of large loans you have taken out recently. Every time you apply for new credit that impacts your overall credit score, so if you purchased a couple of new vehicles and just took out a big student loan in the last three months, your score will be lower than if you spread out your big purchases.

Pay Bills on Time and Avoid Risky Credit Situations

The best way to maintain a high credit score in the long run is to pay all your bills on time. Sometimes when you’re thinking about a big purchase like a home you’re stashing money away for a down payment or other expenses and you accidentally miss payments on some of your bills, or you significantly reduce your credit payments in the months leading up to the purchase than you were before. Both of these actions can indicate potential risk and could lower your credit score. To avoid the appearance of risk, pay all your bills on time, and don’t do anything drastic with your finances right before you buy.

For more tips on maintaining a good credit score, or to get the latest mortgage rates and find out how to make your dreams of owning a home into a reality, talk to Altius Mortgage today.