There are many mortgage calculators available online. However, some allow you to try out different scenarios more easily than others. That's important because you want to be able to see how your monthly payments will be affected by different factors: amount of down payment, interest rate, length of contract.
You must be able to calculate your future mortgage using different numbers in order to get a true sense of what you can afford. For example, how much effect will a larger down payment have on your mortgage? Or a half a percent higher percentage on the interest rate? These may have a huge effect on your monthly payment -- or they may only mean a difference of a few dollars.
But you need to know this information before you discover the house of your dreams.Using this mortgage payment calculator can help you target a loan amount that provides a comfortable monthly payment
Another benefit of using monthly payment calculator is learning how much you can save by refinancing into a shorter loan repayment term; or, if you currently have a 15 year mortgage and want to convert to a 30 year loan, you can see how much your monthly. payments will decrease. Entering different loan amounts, interest rates, and repayment terms can help you discover how to save on a mortgage loan with terms that accommodate your budget.
Sunday, November 8, 2009
Friday, November 6, 2009
Home Mortgage Rate Information
Home Mortgage Rate or Mortgage interest rates are determined by credit history strength, the number of points you pay, the size of your down payment and the type of loan program you choose.
* Understanding Mortgage Trends
* Home Mortgage Rate Factors
* Pay Points For Lower Rate
* Annual Percentage Rate (APR)
* Mortgage Market Information
How To Get the Best Home Mortgage Rate
Getting the best home mortgage rate is possible by visiting online sites that provide today’s trends in mortgage rates. Basically, most of them are updated daily. There are sites that have mortgage calculators that you can use to identify monthly payments for any fixed loan. You just need to input the data and a mortgage calculator will calculate how much interest you need to pay every month. If you are looking for ways how to get the best home mortgage rate, then you have come to the right place. Here are some helpful guidelines on how to do it:
1. Shop for home mortgage rates.
When purchasing your dream home, shopping is necessary for you to acquire the best deal. Of course, do not forget to compare interest rates and negotiate with the lenders. You can chase the best home loan rates online and offline. Home loans offering closing costs below $1,000 are considered to be the best deals.
2. Fix your credit card report and have a good credit history.
It is very important that you fix your credit report. If you have any unresolved issues from the past, then do your best effort to fix them. More often than not, lenders do a background check on your credit status and make use of the results to evaluate mortgage rates.
3. Minimize your debt.
Debt-to-income is another thing that lenders check. DTI helps lenders calculate the amount you can borrow.
4. Pay your bills on time.
Paying your bills on time will provide you with a good credit card score and certainly will give a good impression to the lender. Lenders like borrowers who pay on time. Why? Because it simply means they are the type of borrowers who are not hard to deal with.
5. Get all the information you need from different lenders.
Different types of lenders including mortgage brokers, mortgage firms, commercial banks and thrift organizations provide home loans. Different lenders may give you different prices, so it is very important that you talk to each of them and ask for the best price.
6. Get the cost details.
Make sure to ask the lender how much money you need to deposit for the down payment. Getting the cost details such as down payment and monthly payment is not enough. You also need to know the information about the type of loan and loan amount so that you can evaluate. Fees, Points, Rates and Mortgage Insurance are also the things you need to ask your lender about.
7. Get the best deal.
Once you have gathered all the information you need from every lender, it is time to settle on the best deal. Let the lender jot down all the costs you need to pay every month. Check the paper and ask if he can make some adjustments for you. Asking for a lower rate will cost no harm on your part. Just be brave and take the chance.
Well plan and do collection of Home Mortgage Rate information is important to get best deal before buying your house.
Tuesday, November 3, 2009
How Get Low Mortgage Rates
If you're in the market for a mortgage, here's what you can do right now to find and qualify for the cheapest possible loan.
Smart move 1. Shop around.
Financing a home is the single biggest financial decision most of us make. You've got to shop for a loan at least as hard as you'd shop for a car or a Caribbean vacation.
Don't take whatever they offer from the bank where you have a checking account or the mortgage broker in a nearby strip mall.
Compare interest rates and fees from dozens of lenders by scouring newspaper ads and Internet sites. Loans offering the lowest rate with fees of $1,000 or less are usually the best deals.
Our extensive database of mortgage rates is a great place to start looking.
Smart move 2. Fix any mistakes on your credit reports.
Your credit score is the single most important factor in determining how much you'll pay for a loan.
That score is based on information pulled from the credit histories maintained by the three, major credit-reporting agencies -- Experian, TransUnion and Equifax.
If there are mistakes on your credit report, and those mistakes hurt your credit score, you'll pay the price in the form of a higher interest rate.
Start by obtaining a free copy of your credit reports from each agency at annualcreditreport.com.
Read the reports carefully, and look for errors. To fix them, start by noting the errors on a copy of the report. Write a letter to the credit bureau explaining the problems and asking them to investigate. Enclose any proof you have, and send the whole thing by certified mail.
Here's a form letter for correcting credit reports that tells you exactly what to say and where to send it.
Smart move 3. Pay your bills on time.
The biggest part of your credit score -- 35% of it -- is based on whether you pay your bills on time.
When you apply for a mortgage, you should have no late payments on your credit report for at least six months.
More than anything, lenders want to know you will pay your mortgage on time every month. If your credit history shows you've skipped a payment or even been a few days late, you're seen as a bigger risk. And risky borrowers pay higher rates -- or they don't get a mortgage at all.
A late payment only weeks or even a few months before applying for a mortgage will be taken particularly seriously.
Smart move 4. Pay down your credit card debt.
Almost one-third of your credit score is based on how much of the available credit you've tapped.
If you owe $6,000 on a card with a $10,000 credit limit, you've used more than half of your available credit -- and that's too much.
You're penalized anytime your debt-to-available-credit ratio climbs above 50%. Reducing your balance to less than half the credit limit on each card will have an immediate and positive impact on your credit score.
Smart move 5. Don't apply for new credit cards or other consumer loans.
Potential lenders will check your credit report when you fill out an application, and those inquiries are noted on your history. Each inquiry can lower your credit score by up to 12 points.
Mortgage rate today
Mortgage Interest Rates Today Firm – Current 30-Yr Fixed Interest Rate 4.875
Prices of Residential Mortgage Backed Securities rose ever so slightly today and not enough to effect mortgage interest rates which move their opposite. The 10 year treasury yield, used to predict mortgage interest rates, is up today and at 3.42 as of 12:38 PM PST. The yield was as low as 3.39 today. Effecting the mortgage market today was a report that pending home sales were up an unexpected 6.1 percent, far higher than fore casted.
Current Mortgage Interest Rates
A redneck mansion.
FreeRateUpdate.com research of wholesale mortgage lender’s rate sheets shows the following mortgage interest rates as of 12:54 AM PST. The current 30 year fixed mortgage interest rate at par is 4.875 percent. It’s been pretty flat for almost 3 weeks since hitting a 5 month low at 4.625 percent. The current 15 year fixed mortgage interest rate is 4.25 percent. The current 5/1 ARM interest rate is 3.75 percent.
Today’s Mortgage Interest Rates as Reported by Zillow and Bankrate
Zillow reports a national average 30 year fixed rate of 4.78 percent as of 12:46 Pm PST. Zillow also said the following , ” National mortgage rates on 30-year fixed mortgages remained stable at 4.77% on November 2, 2009, according to Zillow Mortgage Marketplace. As a comparison, state rates ranged from a low of 4.64% (DC) to a high of 5.14% (MO)”.Bankrate.com reports mortgage interest ratesas follows, 30-year fixed-rate 5.16 percent, 15-year fixed-rate 4.6 percent, 5/1 ARM 4.26 percent. These Bankrate.com national averages tend be on the high end.
Current Mortgage Rates Down a Tad. 30-Yr Fixed-Rate at 4.875 as Up and Down Week Continues
Current mortgage rates are stable.
Most major economic reports came in close to expected today yet we saw a big move in the Dow and bond yields. The Dow is down 224 points today as of 11:30 AM PST. The 10 year treasury yield, used to forecast mortgage rates, is down over 2 percent overall and at 3.42 percent as of 11:31 AM PST. Prices of RMBS, of which mortgage rates move opposite, are up today as investors seek safe havens wary of the plummeting stock market.
Despite changes in RMBS prices and bond yields, which have been up and down all week, it’s been a quiet week for mortgage rates which threatened to go up and down several times but remain the same. As of now following the increase in RMBS prices and decrease in the 10 year treasury yield mortgage rates are stable and more likely to go down than up.
Current Mortgage Rates
FreeRateUpdate.com research of wholesale lender’s current mortgage rates shows the following as of 11:35 AM PST. The current conforming 30 year fixed mortgage rate is 4.875 percent at par, where it’s remained for almost 3 weeks now. The current conforming 15 year fixed mortgage rate is 4.25 percent at par. 15 year fixed mortgage rates have sea sawed by an 1/8 of a point of late going from 4.25 to 4.375 percent on any given day. Current 5/1 ARM mortgage rates are as low as 3.75 percent at par. Par rates are the lowest available interest rates without the requirement by the lender for the borrower to pay additional points and fees. Typically par rates can be obtained with 1 point origination.
Mortgage Rates Forecast
The past 2 years mortgage rates have bottomed out during the holiday season. We’ll hope this trend continues this year.
Today’s Mortgage Rates: 30-Year Fixed-Rate at 4.875 Closer to 5 Percent. Bonds Down.
Prices of Residential Mortgage Backed Securities are up today. Mortgage rates, which move the opposite RMBS, are now pressured to go up. The 10 year treasury yield, a leading indicator for conforming 30 year fixed mortgage rates is up over 2 percent overall at 3.5 as of 9:55 pm PST. When mortgage rates were near 4.5 percent fixed for 30-years just 2 1/2 weeks ago the yield was below 3.2 percent. Today’s up tic in RMBS prices has not been significant enough to move mortgage rates yet.
Today's Mortgage Rate at 4.875 Fixed for 30 Years
Yesterday RMBS prices went up on strong demand at the treasury bond auction and weak new home sales. Mortgage rates stabilized as the 30-year fixed mortgage rate moved nearer 4.75 percent than 5 percent. 30-year fixed mortgage rates have been at 4.875 percent at par for most of the past 3 weeks. The trend the past couple days has been for the stock market to go up and mortgage ratesto go up and vice versa.
Today’s Mortgage Rates
FreeRateUpdate.com research of wholesale mortgage lender’s current mortgage ratesshows the following interest rates at par. Par rates are the lowest available interest rates without the requirement by the lender for the borrower to pay additional points and fees.
Today’s 30 year fixed mortgage rate is 4.875 percent. Today’s 15 year fixed mortgage rate is 4.25 percent at par. Today’s 5/1 ARM mortgage rate is 3.75 percent. Today’s mortgage rates are virtually unchanged from the levels we’ve seen over the past 2 1/2 weeks.
Current Mortgage Rates Unlikely to Rise: Current 30 Year Fixed Mortgage Rate 4.875.
Prices of Residential Mortgage Backed Securities are up slightly today. Current mortgage rates, which move opposite the price of RMBS, remain the same. Current mortgage rates are unlikely to rise given RMBS price increases the past 2 days.
Late last week it seemed foreordained conforming 30 year fixed mortgage rates would rise above 5 percent. The 10 year treasury yield, one of the leading indicators for current mortgage rates, spiked to the mid 3’s a level not seen since mid September.
Current mortgage rates have stabilized.
Current Mortgage Rates
FreeRateUpdate.com research of wholesale lender’s current mortgage rates shows little to no changes in the past 24 hours. Current 30 year fixed mortgage rates are at 4.875 percent at par. Current 15 year fixed mortgage rates are at 4.25 percent at par. Current 5/1 mortgage rates are at 3.75 percent at par. Par rates are the lowest available interest rates not requiring additional points to be paid by the borrower, also known as buy down points.
Current Mortgage Rates Forecast
Though home values are declining slower by the month today’s report which says new home sales unexpectedly were down is favorable for current mortgage rates. The Fed holds a 5 year treasury bond auction today following yesterday’s 2 year auction which was met with high demand. High demand at bond auction’s is good for mortgage rates which move the opposite bonds.
Today’s Mortgage Rates: Today’s 30 Year Mortgage Rate Remains at 4.875. Bond Prices Up.
Mortgage rates todayare still at 4.875 percent fixed for 30 years according to FreeRateUpdate.com research of wholesale mortgage lender’s rate sheets.
The 10 year treasury yield, used to forecast conforming 30 year fixed mortgage rates, dipped drastically to 3.46 down 0.0920 (2.59%). The yield closed yesterday at it’s highest level in over a month. Mortgage rates closed yesterday at their highest level in a month as well and very near 5 percent. Mortgage rates have been below 5 percent for over a month.
Demand for 2 year T-Bonds today was high. Mortgage rates are stable.
Today’s Mortgage Rates Forecast
As a result of the less than impressive Consumer Confidence report and strong demand at the 2 year treasury bond auction today prices on Residential Mortgagte Backed Securities rose. Mortgage Rates which move the opposite RMBS are now stable. Mortgage rates had been likely to rise prior to today hanging in by a thread under 5 percent.
Today’s Mortgage Rates According to FreeRateUpdate.com Research
FreeRateUpdate.com research of wholesale lender’s mortgage rates today shows the following
30 year fixed mortgage rates today are at 4.875 percent. 15 year fixed mortgage rates today are at 4.375 percent. 5/1 ARM mortgage rates today are at 3.875 percent. We’ve seen these same levels for the most part over the past 2 weeks.
Today’s Mortgage Rates Hanging In – Today’s 30 Year Fixed Rate STILL 4.875
Prices on Residential Mortgage Backed Securities declined today. Mortgage rates, which move the opposite RMBS prices, remained just below 5 percent. FreeRateUpdate.com research of wholesale mortgage lender’s rate sheets shows 30 year fixed mortgages available for qualified borrowers as low as 4.875 percent at par as of 4:34 pm PST. Par rates are the lowest interest rates available without the requirement by the lender for the borrower to pay additional points and fees. As a result of the decline in price of residential mortgage backed securities today it’s likely mortgage rates will go higher.
Today's mortgage rates are still under 5 percent 30-years fixed but likely to go higher.
Today’s Mortgage Rates
Our research of today’s mortgage rates according to wholesale lender’s mortgage rate sheets shows the following:
- Current 30 year fixed mortgage rates as low as 4.875 percent at par
- Current 15 year fixed mortgage rates as low as 4.35 percent at par
- Current 5/1 adjustable rate mortgage rates as low as 3.75 percent at par
Par rates are the lowest available interest rates offered by a lender without the requirement by the borrower to pay additional points above and beyond regular closing costs.
30 Year Fixed Mortgage Rates Finish the Week Near 5 Percent – Likely Mortgage Rates Higher Monday
30-year fixed mortgage rates finished this week near 5 percent sea sawing back and forth from 4.75 to 4.875 percent Monday through Friday. Freddie Mac said Thursday afternoon in their weekly mortgage rates survey that 30 year fixed mortgage ratesaveraged 5 percent Monday through Wednesday. Freddie is always a little on the high end. Even higher than Freddie Mac is Bankrate.com. On Bankrate’s website they’ve got 30 year fixed mortgage rates averaging 5.15 percent. Zillow is displaying a 30 year fixed mortgage rate of 4.84.
So What’s Today’s 30 Year Fixed Mortgage Rate?
Higher mortgage rates will make it tougher to sell.
FreeRateUpdate.com research of wholesale mortgage lender’s rate sheets shows 30 year fixed mortgages within Fannie/Freddie loan limits as low as 4.875 percent at par. 4.875 percent has been available since 2 Friday’s ago when mortgage rates shot upward from near 4.5 percent. Wednesday afternoon brought the best rates of the week when 30 year fixed mortgages were readily available at 4.75 percent.
The Benchmark Yield and Mortgage Rates Next Week
Today saw the benchmark 10 year treasury yield, used to forecast conforming fixed mortgage rates, shoot up almost 2 percent and into the high 3.4’s. The yield was below 3.2 percent when 30 year fixed mortgage rates neared 4.5 percent. The yield has been anywhere from 3.2 to 3.5 in the past month on any given day typically moving down when the Fed holds big bond auctions. When demand for treasuries are high prices go up and yields and mortgage rates which move their opposite go down. Though the yield moved up significantly today lenders for the most part held their mortgage rates in check. That’s typical for a Friday afternoon. Expect higher mortgage rates, likely at 5 percent 30-years fixed on Monday morning unless the yield moves back down over a 1/10 of a percent.
Current Mortgage Rates: Current 30 Year Fixed Mortgage Rate 4.875 but Likely to Rise
Current mortgage rates are likely to be adjusted upward by mortgage lenders as the benchmark 10 year treasury yield, the leading indicator for today’s mortgage rates, continues to rise fast. The yield is up to 3.47, 0.0480 (1.40%) overall. As mortgage rates approached 4.5 percent, 30-years fixed, just 2 weeks ago the yield was below 3.2 percent. Today’s 30 year fixed mortgage rates are likely to move above 5 percent for the first time in about a month.
Current mortgage rates are rising.
Current Mortgage Rates (we’ll update rates as soon as lenders make adjustments)
FreeRateUpdate.com research of wholesale mortgage lenders rate sheets shows current 30 year fixed mortgage rates at 4.875 percent at par, where they’ve been for the most of the past 2 weeks. 15 year fixed mortgage rates are at 4.25 percent. Current 5/1 ARM mortgage rate is 3.875 percent at par. Par rates are the lowest available interest rates by a lender without the requirement for the borrower to pay additional points and fees.
Current Average Mortgage Rates
Zillow reports current 30 year fixed national average mortgage rate at 4.84 percent as of 12:15 pm PST. Zillow reports today’s national average for 15 year fixed conforming mortgages at 4.31 percent as of 12:16 pm PST. These rates are likely to rise and we’ll let you know when they do.
Bankrate.com reports today’s national average mortgage rates higher than Zillow. Bankrate says today’s average 30 year fixed mortgage rate is 5.15 percent. Bankrate says today’s average 15 year fixed mortgage rate is 4.71 percent. Both of these rates are as of 12:17 pm PST and higher than last week.
Current Mortgage Rates Unchanged – Current 30 Year Fixed Mortgage Rate at 4.875
Current mortgage rates are unchanged.
The 10 year yield, used to forecast current mortgage rates, was flat today closing at 3.42 percent. Current mortgage rates which tend to follow the 10 year yield were flat as a result. Freddie Mac said today in their weekly mortgage rates survey that 30 year fixed mortgage rates averaged 5 percent this Monday through Wednesday.
Current Mortgage Rates
According to FreeRateUpdate.com research of wholesale lender’s current mortgage rates30 year fixed mortgage rates are as low as 4.875 percent at par. Par rates are the lowest available interest rates without the requirement by the lender for the borrower to pay additional points. Current 15 year fixed mortgage rates are as low as 4.25 percent at par. Current 5/1 ARM mortgage rates are as low as 3.875 percent.
- 30-year fixed-rate = 4.875%
- 20-year fixed-rate= 4.75%
- 15-year fixed-rate= 4.25%
- 5/1 ARM rate= 3.875%
Current Mortgage Rates Flat Since Move Up
A week and a half ago mortgage rates seemed to be approaching 4.5 percent fixed for 30 years. Current mortgage rates are unchanged from the Friday before last when 30 year fixed mortgage rates jumped from 4.625 percent to 4.875 percent in a matter of hours. Until the price of residential mortgage backed securities changes substantially mortgage rates which move opposite mortgage backed securities will see marginal changes. It’s likely mortgage rates waiver between 4.75 and 5 percent for the rest of the week.
30 Year Fixed Mortgage Rate Today 4.875 – Today’s Mortgage Rates Open Higher
The 10 year treasury yield, the best indicator of fixed conforming mortgage rates today rose significantly yesterday to 3.441 from as low as 3.315 early Tuesday. As a result mortgage rates today are up about an 1/8 percent on conforming 30 year fixed mortgages, 20 year fixed mortgages, 15 year fixed mortgages, and the 5/1 ARM.
Today's mortgage rates up but still under 5
Today’s Mortgage Rates
An increase of an 1/8 percent brought today’s 30 year fixed mortgage rateto 4.875 percent at par, according to FreeRateUpdate.com research of wholesale lender’s mortgage rates today. The 15 year fixed rose from 4.25 percent to 4.375 percent at par. The 5/1 ARM rose from 3.75 to 3.875 percent. Mortgage rates this week were almost 1/4 percent higher Monday and Wednesday then they were Tuesday.
Today’s Mortgage Rates – Freddie Mac
Freddie Mac said in their weekly mortgage rates survey today that 30 year fixed conforming mortgage rates averaged 5 percent Monday through Wednesday of this week, up from 4.92 percent last week. Freddie says 15 year fixed mortgage rates averaged 4.43 percent, up from 4.37 last week.
Today’s Zillow National Average Mortgage Rates
As of 10:31 am PST Zillow reports their national average 30 year fixed mortgage rate at 4.86 percent, up almost 1/10 percent from early this morning.
Mortgage Trends
The US home mortgage trend and the fluctuation of home mortgage rates are important benchmarks of the overall economy. While there are other other economic factors interest rates are largely tied to the decisions made by the Federal Reserve Bank. Interest rates are adjusted by the Fed according to financial matters in the US such as GDP growth, export and import numbers, and the inflation rate.
Mortgage rates are used to help control the economy. If the movement of the economy is considered to be too fast, higher rates are imposed so that individuals and corporations would be less willing to apply for loans. Conversely if the economy seems to be rather slow or stagnant, rates are lowered so that people would be more enticed to engage in additional business transactions. Thus home mortgage trends will generally move up or down as the economy contracts or expands.
Trend in Home Mortgage Rates:
It is interesting to observe that mortgage rates have been lower than 8.5% since the year 1996, with the lowest rates of about 5.5% seen in the middle of 2005. While individuals might see an extremely different mortgage rate at a particular time due to other factors that affect rates (their salaries or credit histories), the lower trend has generally been observed to be generally consistent throughout the US economy.
The fall of interest rates from higher levels prior to 1996 allowed more people to buy their homes, purchase lands, or trade up to larger houses. Perhaps this reflects an effort to speed up the economy from that time until now. However this year, mortgage rates are rising probably because of some unwise lending decisions made during a time of too easy money and rates held at extremely low levels by the Federal Reserve Bank for too long of a time period. A vicious correction is now underway with mortgage markets highly unsettled.
Current Home Mortgage Rates:
Mortgage rates in the year 2008 are generally higher than that of the previous year with rates of about 6.5 percent for 30-year fixed rate mortgages (FRM). The difference between interest rates this year and last year are not really significantly high as it would entail only a few hundred dollars increase in yearly payments. This probably would not stop many people from getting mortgages, however if the rise continues, you would expect that more people would become hesitant to apply for home loans.
The problem with the current trend in home mortgage rates is not so much an increase in rates but an unwillingness of leaders to lend, even to people with good credit histories. The trauma and losses to lenders caused by the ongoing sub prime mortgage debacle starting in 2007 has left many lenders with weak balance sheets and they are operating in a panic mode. A record level of foreclosures in 2008 is causing a sharp contraction in home mortgage lending activity.
With probably a few hundred billions of mortgage and derivative instrument write downs still to take place by mortgage lenders the trend for new home mortgage lending will probably remain down for some time to come. However, that is not all bad news for those looking for a new home. People who have cash to work with and a good relationship with their bank can probably find super deals on homes by working directly with stressed out lenders who have an excessive inventory of foreclosed homes on their books.
In fact, if you have significant cash on deposit with a bank or financial institution you may not even have to use it for your home purchase. Even with the home mortgage trend down lenders that have non performing loans on their books will be eager to work with those who have capital on deposit and may make deals that will require very little if any of the cash rich home buyers cash to be used as an extra inducement to get foreclosed homes off their books.
Adjustable mortgage rates
An adjustable rate mortgage (ARM) is a mortgage loan where the interest rate on the note is periodically adjusted based on a variety of indices.[1] Among the most common indices are the rates on 1-year constant-maturity Treasury (CMT) securities, the Cost of Funds Index (COFI), and the London Interbank Offered Rate (LIBOR). A few lenders use their own cost of funds as an index, rather than using other indices. This is done to ensure a steady margin for the lender, whose own cost of funding will usually be related to the index. Consequently, payments made by the borrower may change over time with the changing interest rate (alternatively, the term of the loan may change). This is not to be confused with the graduated payment mortgage, which offers changing payment amounts but a fixed interest rate. Other forms of mortgage loan include the interest only mortgage, the fixed rate mortgage, the negative amortization mortgage, and the balloon payment mortgage. Adjustable rates transfer part of the interest rate risk from the lender to the borrower. They can be used where unpredictable interest rates make fixed rate loans difficult to obtain. The borrower benefits if the interest rate falls and loses out if interest rates rise.
Adjustable rate mortgages are characterized by their index and limitations on charges (caps). In many countries, adjustable rate mortgages are the norm, and in such places, may simply be referred to as mortgages.
All adjustable rate mortgages have an adjusting interest rate tied to an index.[1]
In Western Europe, the index may be the ECB Refi rate (where the mortgage is called a tracker mortgage), TIBOR or Euro Interbank Offered Rate (EURIBOR).
Six common indices in the United States are:
- 11th District Cost of Funds Index (COFI)
- London Interbank Offered Rate (LIBOR)
- 12-month Treasury Average Index (MTA)
- Constant Maturity Treasury (CMT)
- National Average Contract Mortgage Rate
- Bank Bill Swap Rate (BBSW)
In some countries, banks may publish a prime lending rate which is used as the index. The index may be applied in one of three ways: directly, on a rate plus margin basis, or based on index movement.
A directly applied index means that the interest rate changes exactly with the index. In other words, the interest rate on the note exactly equals the index. Of the above indices, only the contract rate index is applied directly.[1]
To apply an index on a rate plus margin basis means that the interest rate will equal the underlying index plus a margin. The margin is specified in the note and remains fixed over the life of the loan.[1] For example, a mortgage interest rate may be specified in the note as being LIBOR plus 2%, 2% being the margin and LIBOR being the index.
The final way to apply an index is on a movement basis. In this scheme, the mortgage is originated at an agreed upon rate, then adjusted based on the movement of the index.[1] Unlike direct or index plus margin, the initial rate is not explicitly tied to any index; the adjustments are tied to an index.
Basic features of ARMs
The most important basic features of ARMs are:[2]
- Initial interest rate. This is the beginning interest rate on an ARM.
- The adjustment period. This is the length of time that the interest rate or loan period on an ARM is scheduled to remain unchanged. The rate is reset at the end of this period, and the monthly loan payment is recalculated.
- The index rate. Most lenders tie ARM interest rates changes to changes in an index rate. Lenders base ARM rates on a variety of indices, the most common being rates on one-, three-, or five-year Treasury securities. Another common index is the national or regional average cost of funds to savings and loan associations.
- The margin. This is the percentage points that lenders add to the index rate to determine the ARM's interest rate.
- Interest rate caps. These are the limits on how much the interest rate or the monthly payment can be changed at the end of each adjustment period or over the life of the loan.
- Initial discounts. These are interest rate concessions, often used as promotional aids, offered the first year or more of a loan. They reduce the interest rate below the prevailing rate (the index plus the margin).
- Negative amortization. This means the mortgage balance is increasing. This occurs whenever the monthly mortgage payments are not large enough to pay all the interest due on the mortgage. This may be caused by the payment cap contained in the ARM when are high enough that the principal plus interest payment is greater than the payment cap.
- Conversion. The agreement with the lender may have a clause that allows the buyer to convert the ARM to a fixed-rate mortgage at designated times.
- Prepayment. Some agreements may require the buyer to pay special fees or penalties if the ARM is paid off early. Prepayment terms are sometimes negotiable.
It should be obvious that the choice of a home mortgage loan is complicated and time consuming. As a help to the buyer, the Federal Reserve Board and the Federal Home Loan Bank Board have prepared a mortgage checklist.
Limitations on charges (caps)
Any mortgage where payments made by the borrower may increase over time brings with it the risk of financial hardship to the borrower. To limit this risk, limitations on charges—known as caps in the industry—are a common feature of adjustable rate mortgages.[1] Caps typically apply to three characteristics of the mortgage:
- frequency of the interest rate change
- periodic change in interest rate
- total change in interest rate over the life of the loan, sometimes called life cap
For example, a given ARM might have the following types of caps:
Interest rate adjustment caps:
- interest adjustments made every 6 months, typically 1% per adjustment, 2% total per year
- interest adjustments made only once a year, typically 2% maximum
- interest rate may adjust no more than 1% in a year
Mortgage payment adjustment caps:
- maximum mortgage payment adjustments, usually 7.5% annually on pay-option/negative amortization loans
Life of loan interest rate adjustment caps:
- total interest rate adjustment limited to 5% or 6% for the life of the loan.
Caps on the periodic change in interest rate may be broken up into one limit on the first periodic change and a separate limit on subsequent periodic change, for example 5% on the initial adjustment and 2% on subsequent adjustments.
Although uncommon, a cap may limit the maximum monthly payment in absolute terms (for example, $1000 a month), rather than in relative terms.
ARMs that allow negative amortization will typically have payment adjustments that occur less frequently than the interest rate adjustment. For example, the interest rate may be adjusted every month, but the payment amount only once every 12 months.
Cap structure is sometimes expressed as initial adjustment cap / subsequent adjustment cap / life cap, for example 2/2/5 for a loan with a 2% cap on the initial adjustment, a 2% cap on subsequent adjustments, and a 5% cap on total interest rate adjustments. When only two values are given, this indicates that the initial change cap and periodic cap are the same. For example, a 2/2/5 cap structure may sometimes be written simply 2/5.
Reasons for ARMs
ARMs generally permit borrowers to lower their initial payments if they are willing to assume the risk of interest rate changes. In many countries, banks or similar financial institutions are the primary originators of mortgages. For banks that are funded from customer deposits, the customer deposits will typically have much shorter terms than residential mortgages. If a bank were to offer large volumes of mortgages at fixed rates but to derive most of its funding from deposits (or other short-term sources of funds), the bank would have an asset-liability mismatch: in this case, it would be running the risk that the interest income from its mortgage portfolio would be less than it needed to pay its depositors. In the United States, some argue that the savings and loan crisis was in part caused by this problem, that the savings and loans companies had short-term deposits and long-term, fixed rate mortgages, and were caught when Paul Volcker raised interest rates in the early 1980s. Therefore, banks and other financial institutions offer adjustable rate mortgages because it reduces risk and matches their sources of funding.
Banking regulators pay close attention to asset-liability mismatches to avoid such problems, and place tight restrictions on the amount of long-term fixed-rate mortgages that banks may hold (in relation to their other assets). To reduce this risk, many mortgage originators will sell many of their mortgages, particularly the mortgages with fixed rates.
For the borrower, adjustable rate mortgages may be less expensive, but at the price of bearing higher risk. Many ARMs have "teaser periods," which are relatively short initial fixed-rate periods (typically one month to one year) when the ARM bears an interest rate that is substantially below the "fully indexed" rate. The teaser period may induce some borrowers to view an ARM as more of a bargain than it really represents. A low teaser rate predisposes an ARM to sustain above-average payment increases.
ARM Variants
Hybrid ARMs
A hybrid ARM features an interest rate that is fixed for an initial period of time, then floats thereafter. The "hybrid" refers to the ARM's blend of fixed-rate and adjustable-rate characteristics. Hybrid ARMs are referred to by their initial fixed-rate and adjustable-rate periods, for example 3/1 for an ARM with a 3-year fixed interest-rate period and subsequent 1-year interest-rate adjustment periods. The date that a hybrid ARM shifts from a fixed-rate payment schedule to an adjusting payment schedule is known as the reset date. After the reset date, a hybrid ARM floats at a margin over a specified index just like any ordinary ARM.[3]
The popularity of hybrid ARMs has significantly increased in recent years. In 1998, the percentage of hybrids relative to 30-year fixed-rate mortgages was less than 2%; within 6 years, this increased to 27.5%.[3]
Like other ARMs, hybrid ARMs transfer some interest-rate risk from the lender to the borrower, thus allowing the lender to offer a lower note rate in many interest-rate environments.
[edit] Option ARMs
An "option ARM" is typically a 30-year ARM that initially offers the borrower four monthly payment options: a specified minimum payment, an interest-only payment, a 15-year fully amortizing payment, and a 30-year fully amortizing payment.[4]
These types of loans are also called "pick-a-payment" or "pay-option" ARMs.
When a borrower makes a Pay-Option ARM payment that is less than the accruing interest, there is "negative amortization", which means that the unpaid portion of the accruing interest is added to the outstanding principal balance. For example, if the borrower makes a minimum payment of $1,000 and the ARM has accrued monthly interest in arrears of $1,500, $500 will be added to the borrower's loan balance. Moreover, the next month's interest-only payment will be calculated using the new, higher principal balance.
Option ARMs are often offered with a very low teaser rate (often as low as 1%) which translates into very low minimum payments for the first year of the ARM. During boom times, lenders often underwrite borrowers based on mortgage payments that are below the fully amortizing payment level. This enables borrowers to qualify for a much larger loan (i.e., take on more debt) than would otherwise be possible. When evaluating an Option ARM, prudent borrowers will not focus on the teaser rate or initial payment level, but will consider the characteristics of the index, the size of the "mortgage margin" that is added to the index value, and the other terms of the ARM. Specifically, they need to consider the possibilities that (1) long-term interest rates go up; (2) their home may not appreciate or may even lose value or even (3) that both risks may materialize.
Option ARMs are best suited to sophisticated borrowers with growing incomes, particularly if their incomes fluctuate seasonally and they need the payment flexibility that such an ARM may provide. Sophisticated borrowers will carefully manage the level of negative amortization that they allow to accrue.
In this way, a borrower can control the main risk of an Option ARM, which is "payment shock", when the negative amortization and other features of this product can trigger substantial payment increases in short periods of time.[5]
For example, the minimum payment on an Option ARM can jump dramatically if its unpaid principal balance hits the maximum limit on negative amortization (typically 110% to 125% of the original loan amount). If that happens, the next minimum monthly payment will be at a level that would fully amortize the ARM over its remaining term. In addition, Option ARMs typically have automatic "recast" dates (often every fifth year) when the payment is adjusted to get the ARM back on pace to amortize the ARM in full over its remaining term.
For example, a $200,000 ARM with a 110% "neg am" cap will typically adjust to a fully amortizing payment, based on the current fully-indexed interest rate and the remaining term of the loan, if negative amortization causes the loan balance to exceed $220,000. For a 125% recast, this will happen if the loan balance reaches $250,000.
Any loan that is allowed to generate negative amortization means that the borrower is reducing his equity in his home, which increases the chance that he won't be able to sell it for enough to repay the loan. Declining property values would exacerbate this risk.
Option ARMs may also be available as "hybrids," with longer fixed-rate periods. These products would not be likely to have low teaser rates. As a result, such ARMs mitigate the possibility of negative amortization, and would likely not appeal to borrowers seeking an "affordability" product.
Cash flow ARMs
A cash flow ARM is a minimum payment option mortgage loan. This is a fancy term for a loan that allows a borrower to choose their monthly payment from several options. These payment options usually include the option to pay at the 30 year level, 15 year level, interest only level, and a minimum payment level. The minimum payment level is usually lower than the interest only payment. This type of loan can result in negative amortization. The option to make a minimum payment is usually available only for the first several years of the loan.
Cash flow ARM mortgages are synonymous with option ARM or payment option ARM mortgages, however it should be noted that not all loans with cash flow options are adjustable. In fact, fixed rate cash flow option loans retain the same cash flow options as cash flow ARMs and option ARMs, but remain fixed for up to 30 years.[citation needed]
Terminology
- X/Y - Hybrid ARMs are often referred to in this format, where X is the number of years during which the initial interest rate applies prior to first adjustment (common terms are 3, 5, 7, and 10 years), and Y is the interval between adjustments (common terms are 1 for one year and 6 for six months). As an example, a 5/1 ARM means that the initial interest rate applies for five years (or 60 months, in terms of payments), after which the interest rate is adjusted annually. (Adjustments for escrow accounts, however, do not follow the 5/1 schedule; these are done annually.)
- Fully Indexed Rate - The price of the ARM as calculated by adding Index + Margin = Fully Indexed Rate. This is the interest rate your loan would be at without a Start Rate (the introductory special rate for the initial fixed period). This means the loan would be higher if adjusting, typically, 1-3% higher than the fixed rate. Calculating this is important for ARM buyers, since it helps predict the future interest rate of the loan.
- Margin - For ARMs where the index is applied to the interest rate of the note on an "index plus margin" basis, the margin is the difference between the note rate and the index on which the note rate is based expressed in percentage terms.[1] This is not to be confused with profit margin. The lower the margin the better the loan is to the borrower as the maximum rate will increase less at each adjustment. Margins will vary between 2%-7%.
- Index - A published financial index such as LIBOR used to periodically adjust the interest rate of the ARM.
- Start Rate - The introductory rate provided to purchasers of ARM loans for the initial fixed interest period.
- Period - The length of time between interest rate adjustments. In times of falling interest rates, a shorter period benefits the borrower. On the other hand, in times of rising interest rates, a shorter period benefits the lender.
- Floor - A clause that sets the minimum rate for the interest rate of an ARM loan. Loans may come with a Start Rate = Floor feature, but this is primarily for Non-Conforming (aka Sub-Prime or Program Lending) loan products. This prevents an ARM loan from ever adjusting lower than the Start Rate. An "A Paper" loan typically has either no Floor or 2% below start.
- Payment Shock - Industry term to describe the severe (unexpected or planned for by borrower) upward movement of mortgage loan interest rates and its effect on borrowers. This is the major risk of an ARM, as this can lead to severe financial hardship for the borrower.
- Cap - Any clause that sets a limitation on the amount or frequency of rate changes.
Loan caps
Loan caps provide payment protection against payment shock, and allow a measure of interest rate certainty to those who gamble with initial fixed rates on ARM loans. There are three types of Caps on a typical First Lien Adjustable Rate Mortgage or First Lien Hybrid Adjustable Rate Mortgage.
Initial Adjustment Rate Cap: The majority of loans have a higher cap for initial adjustments that's indexed to the initial fixed period. In other words, the longer the initial fixed term, the more the bank would like to potentially adjust your loan. Typically, this cap is 2-3% above the Start Rate on a loan with an initial fixed rate term of 3 years or lower and 5-6% above the Start Rate on a loan with an initial fixed rate term of 5 years or greater.
Rate Adjustment Cap: This is the maximum amount by which an Adjustable Rate Mortgage may increase on each successive adjustment. Similar to the initial cap, this cap is usually 1% above the Start Rate for loans with an initial fixed term of 3 years or greater and usually 2% above the Start Rate for loans that have an initial fixed term of 5 years or greater
Lifetime Cap: Most First Mortgage loans have a 5% or 6% Life Cap above the Start Rate (this ultimately varies by the lender and credit grade).
- Industry Shorthand for ARM Caps
Inside the business caps are expressed most often by simply the 3 numbers involved that signify each cap. For example, a 5/1 Hybrid ARM may have a cap structure of 5/2/5 (5% initial cap, 2% adjustment cap and 5% lifetime cap) and insiders would call this a 5-2-5 cap. Alternately a 1 year arm might have a 1/1/6 cap (1% initial cap, 1% adjustment cap and 6% lifetime cap) known as a 1-1-6, or alternately expressed as a 1/6 cap (leaving out one digit signifies that the initial and adjustment caps are identical).
- Negative amortization ARM caps
See the complete article for the type of ARM that Negative amortization loans are by nature. Higher risk products, such as First Lien Monthly Adjustable loans with Negative amortization and Home Equity Lines of Credit aka HELOC have different ways of structuring the Cap than a typical First Lien Mortgage. The typical First Lien Monthly Adjustable loans with Negative amortization loan has a life cap for the underlying rate (aka "Fully Indexed Rate") between 9.95% and 12% (maximum assessed interest rate). Some of these loans can have much higher rate ceilings. The fully indexed rate is always listed on the statement, but borrowers are shielded from the full effect of rate increases by the minimum payment, until the loan is recast, which is when principal and interest payments are due that will fully amortize the loan at the fully indexed rate.
- Home Equity Lines of Credit HELOC
Since HELOCs are intended by banks to primarily sit in second lien position, they normally are only capped by the maximum interest rate allowed by law in the state wherein they are issued. For example, Florida currently has an 18% cap on interest rate charges. These loans are risky in the sense that to lenders, they are practically a credit card issued to the borrower, with minimal security in the event of default. They are risky to the borrower in the sense that they are mostly indexed to the Wall Street Journal Prime Rate, which is considered a Spot Index, or a financial indicator that is subject to immediate change (as are the loans based upon the Prime Rate). The risk to borrower being that a financial situation causing the Federal Reserve to raise rates dramatically (see 1980, 2006) would effect an immediate rise in obligation to the borrower, up to the capped rate.
Popularity
Variable rate mortgages are the most common form of loan for house purchase in the United Kingdom, Ireland and Canada but are unpopular in some other countries. Variable rate mortgages are very common in Australia and New Zealand. In some countries, true fixed-rate mortgages are not available except for shorter-term loans; in Canada, the longest term for which a mortgage rate can be fixed is typically no more than ten years, while mortgage maturities are commonly 25 years.
In many countries, it is not feasible for banks to borrow at fixed rates for very long terms; in these cases, the only feasible type of mortgage for banks to offer may be adjustable rate mortgages (barring some form of government intervention).
For those who plan to move within a relatively short period of time (three to seven years), they are attractive because they often include a lower, fixed rate of interest for the first three, five, or seven years of the loan, after which the interest rate fluctuates.
Pricing
Adjustable rate mortgages are typically, but not always, less expensive than fixed-rate mortgages. Due to the inherent interest rate risk, long-term fixed rates will tend to be higher than short-term rates (which are the basis for variable-rate loans and mortgages). The difference in interest rates between short and long-term loans is known as the yield curve, which generally slopes upward (longer terms are more expensive). The opposite circumstance is known as an inverted yield curve and is relatively infrequent.
The fact that an adjustable rate mortgage has a lower starting interest rate does not indicate what the future cost of borrowing will be (when rates change). If rates rise, the cost will be higher; if rates go down, the rate will be lower. In effect, the borrower has agreed to take the interest rate risk. Some studies have shown that on average, the majority of borrowers with adjustable rate mortgages save money in the long term; .[6]
The actual pricing and rate analysis of adjustable rate mortgage in the finance industry is done through various computer simulation methodologies like Monte Carlo method or Sobol sequences. In these analytical techniques, by using an assumed probability distribution of future interest rates, numerous (10,000 - 100,000 or even 1,000,000) possible interest rate scenarios are explored, mortgage cash flows calculated under each, and aggregate parameters like fair value and effective interest rate over the life of the mortgage are estimated. Having these at hand, lending analysts determine whether offering a particular mortgage would be profitable, and if it would represent tolerable risk to the bank.
Prepayment
Adjustable rate mortgages, like other types of mortgage, usually allow the borrower to prepay principal (or capital) early without penalty. Early payments of part of the principal will reduce the total cost of the loan (total interest paid), but will not shorten the amount of time needed to pay off the loan like other loan types. Upon each recasting, the new fully indexed interest rate is applied to the remaining principal to end within the remaining term schedule.
If a mortgage is refinanced, the borrower simultaneously takes out a new mortgage and pays off the old mortgage; the latter counts as a prepayment.
Some ARMs charge prepayment penalties of several thousand dollars if the borrower refinances the loan or pays it off early, especially within the first 3 or 5 years of the loan.[1]
Criticism
Adjustable rate mortgages are sometimes sold to consumers who are unlikely to be able to repay the loan should interest rates rise.[7] In the United States, extreme cases are characterized by the Consumer Federation of America as predatory loans. Protections against interest rate rises include (a) a possible initial period with a fixed rate (which gives the borrower a chance to increase his/her annual earnings before payments rise); (b) a maximum (cap) that interest rates can rise in any year (if there is a cap, it must be specified in the loan document); and (c) a maximum (cap) that interest rates can rise over the life of the mortgage (this also must be specified in the loan document).
What is Mortgage rates
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. 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.
This comes from the Old French "dead pledge," apparently meaning that the pledge ends (dies) either when the obligation is fulfilled or the property is taken through foreclosure.[1]
In most jurisdictions mortgages are strongly associated with loans secured on real estate rather than on other property (such as ships) and in some jurisdictions only land may be mortgaged. A mortgage is the standard method by which individuals and businesses can purchase real estate without the need to pay the full value immediately from their own resources. See mortgage loan for residential mortgage lending, and commercial mortgage for lending against commercial property.
Mortgage lender
A mortgage lender is an investor that lends money secured by a mortgage on real estate. Typically, the purpose of the loan is for the borrower to purchase that same real estate. The borrower, known as the mortgagor, gives the mortgage to the lender, known as the mortgagee. As the mortgagee, the lender has the right to sell the property to pay off the loan if the borrower fails to pay.
The mortgage runs with the land, so even if the borrower transfers the property to someone else, the mortgagee still has the right to sell it if the borrower fails to pay off the loan.
So that a buyer cannot unwittingly buy property subject to a mortgage, mortgages are registered or recorded against the title with a government office, as a public record. The borrower has the right to have the mortgage discharged from the title once the debt is paid.
Borrower
A mortgagor is the borrower in a mortgage—they owe the obligation secured by the mortgage. Generally, the debtor must meet the conditions of the underlying loan or other obligation and the conditions of the mortgage. Otherwise, the debtor usually runs the risk of foreclosure of the mortgage by the creditor to recover the debt. Typically the debtors will be the individual home-owners, landlords or businesses who are purchasing their property by way of a loan.
Other participants
Because of the complicated legal exchange, or conveyance, of the property, one or both of the main participants are likely to require legal representation. The terminology varies with legal jurisdiction; see lawyer, solicitor and conveyancer.
Because of the complex nature of many markets the debtor may approach a mortgage broker or financial adviser to help them source an appropriate creditor, typically by finding the most competitive loan.
The debt is, in civil law jurisdictions, referred to as hypothecation, which may make use of the services of a hypothecary to assist in the hypothecation.
Default on divided property
When a tract of land is purchased with a mortgage and then split up and sold, the "inverse order of alienation rule" applies to decide parties liable for the unpaid debt.
When a mortgaged tract of land is split up and sold, upon default, the mortgagee first forecloses on lands still owned by the mortgagor and proceeds against other owners in an 'inverse order' in which they were sold. For example, A acquires a 3-acre (12,000 m2) lot by mortgage then splits up the lot into three 1-acre (4,000 m2) lots (A, B, and C), and sells lot B to X, and then lot C to Y, retaining lot A for himself. Upon default, the mortgagee proceeds against lot A first, the mortgagor. If foreclosure or repossession of lot A does not fully satisfy the debt, the mortgagee proceeds against lot B, then lot C. The rationale is that the first purchaser should have more equity and subsequent purchasers receive a diluted share.
Legal aspects
Mortgages may be legal or equitable. Furthermore, a mortgage may take one of a number of different legal structures, the availability of which will depend on the jurisdiction under which the mortgage is made. Common law jurisdictions have evolved two main forms of mortgage: the mortgage by demise and the mortgage by legal charge.
Mortgage by demise
In a mortgage by demise, the mortgagee (the lender) becomes the owner of the mortgaged property until the loan is repaid or other mortgage obligation fulfilled in full, a process known as "redemption". This kind of mortgage takes the form of a conveyance of the property to the creditor, with a condition that the property will be returned on redemption.
Mortgages by demise were the original form of mortgage, and continue to be used in many jurisdictions, and in a small minority of states in the United States. Many other common law jurisdictions have either abolished or minimised the use of the mortgage by demise. For example, in England and Wales this type of mortgage is no longer available, by virtue of the Land Registration Act 2002.
Mortgage by legal charge
In a mortgage by legal charge or technically "a charge by deed expressed to be by way of legal mortgage",[2] the debtor remains the legal owner of the property, but the creditor gains sufficient rights over it to enable them to enforce their security, such as a right to take possession of the property or sell it.
To protect the lender, a mortgage by legal charge is usually recorded in a public register. Since mortgage debt is often the largest debt owed by the debtor, banks and other mortgage lenders run title searches of the real estate property to make certain that there are no mortgages already registered on the debtor's property which might have higher priority. Tax liens, in some cases, will come ahead of mortgages. For this reason, if a borrower has delinquent property taxes, the bank will often pay them to prevent the lienholder from foreclosing and wiping out the mortgage.
This type of mortgage is most common in the United States and, since the Law of Property Act 1925,[2] it has been the usual form of mortgage in England and Wales (it is now the only form – see above).
In Scotland, the mortgage by legal charge is also known as Standard Security.[3]
In Pakistan, the mortgage by legal charge is most common way used by banks to secure the financing.[citation needed] It is also known as registered mortgage. After registration of legal charge, the bank's lien is recorded in the land register stating that the property is under mortgage and cannot be sold without obtaining an NOC (No Objection Certificate) from the bank.
Equitable mortgage
See also: Security interest#Types of security
Equitable mortgages don't fit the criteria for a legal mortgage, but are considered mortgages under equity (in the interests of justice) because money was lent and security was promised. This could arise because of procedural or paperwork issues. Based on this definition, there are numerous situations which could lead to an equitable mortgage.[4] As of 1961, English law required the consent of the court before the equitable mortgagee was allowed to sell.[5] When the borrower deposits a title deed with the lender, it has historically created an equitable mortgage in England, but the creation of an equitable mortgage by such a process has been less certain in the United States.[6]
In an equitable mortgage the lender is secured by taking possession of all the original title documents of the property and by borrower's signing a Memorandum of Deposit of Title Deed (MODTD). This document is an undertaking by the borrower that he/she has deposited the title documents with the bank with his own wish and will, in order to secure the financing obtained from the bank.
History
At common law, a mortgage was a conveyance of land that on its face was absolute and conveyed a fee simple estate, but which was in fact conditional, and would be of no effect if certain conditions were met – usually, but not necessarily, the repayment of a debt to the original landowner. Hence the word "mortgage" (a legal term in French meaning "dead pledge"). The debt was absolute in form, and unlike a "live pledge" was not conditionally dependent on its repayment solely from raising and selling crops or livestock or simply giving the crops and livestock raised on the mortgaged land. The mortgage debt remained in effect whether or not the land could successfully produce enough income to repay the debt. In theory, a mortgage required no further steps to be taken by the creditor, such as acceptance of crops and livestock in repayment.
The difficulty with this arrangement was that the lender was absolute owner of the property and could sell it or refuse to reconvey it to the borrower, who was in a weak position. Increasingly the courts of equity began to protect the borrower's interests, so that a borrower came to have an absolute right to insist on reconveyance on redemption. This right of the borrower is known as the "equity of redemption".
This arrangement, whereby the lender was in theory the absolute owner, but in practice had few of the practical rights of ownership, was seen in many jurisdictions as being awkwardly artificial. By statute the common law's position was altered so that the mortgagor would retain ownership, but the mortgagee's rights, such as foreclosure, the power of sale, and the right to take possession, would be protected.
In the United States, those states that have reformed the nature of mortgages in this way are known as lien states. A similar effect was achieved in England and Wales by the Law of Property Act 1925, which abolished mortgages by the conveyance of a fee simple.
Foreclosure and non-recourse lending
See also: Strategic default
In most jurisdictions, a lender may foreclose on the mortgaged property if certain conditions – principally, non-payment of the mortgage loan – apply. Subject to local legal requirements, the property may then be sold. Any amounts received from the sale (net of costs) are applied to the original debt.
In some jurisdictions, mortgage loans are non-recourse loans: if the funds recouped from sale of the mortgaged property are insufficient to cover the outstanding debt, the lender may not have recourse to the borrower after foreclosure. In other jurisdictions, the borrower remains responsible for any remaining debt, through a deficiency judgment. In some jurisdictions, first mortgages are non-recourse loans, but second and subsequent ones are recourse loans.
Specific procedures for foreclosure and sale of the mortgaged property almost always apply, and may be tightly regulated by the relevant government. In some jurisdictions, foreclosure and sale can occur quite rapidly, while in others, foreclosure may take many months or even years. In many countries, the ability of lenders to foreclose is extremely limited, and mortgage market development has been notably slower.
Mortgages in the United States
Types of mortgage instruments
Two types of mortgage instruments are commonly used in the United States: the mortgage (sometimes called a mortgage deed) and the deed of trust.[7]
The mortgage
In all but a few states, a mortgage creates a lien on the title to the mortgaged property. Foreclosure of that lien almost always requires a judicial proceeding declaring the debt to be due and in default and ordering a sale of the property to pay the debt.[citation needed]
Security deed
The deed to secure debt is a mortgage instrument used in the state of Georgia. Unlike a mortgage, a security deed is an actual conveyance of real property in security of a debt. Upon the execution of such a deed, title passes to the grantee or beneficiary (usually lender), however the grantor (debtor) maintains equitable title to use and enjoy the conveyed land subject to compliance with debt obligations.
Security deeds must be recorded in the county where the land is located. Although there is no specific time within which such deeds must be filed, the failure to timely record the deed to secure debt may affect priority and therefore the ability to enforce the debt against the subject property.[8]
The deed of trust
The deed of trust is a deed by the borrower to a trustee for the purposes of securing a debt. In most states, it also merely creates a lien on the title and not a title transfer, regardless of its terms. It differs from a mortgage in that, in many states, it can be foreclosed by a non-judicial sale held by the trustee.[9] It is also possible to foreclose them through a judicial proceeding.[citation needed]
Most "mortgages" in California are actually deeds of trust.[10] The effective difference is that the foreclosure process can be much faster for a deed of trust than for a mortgage, on the order of 3 months rather than a year. Because the foreclosure does not require actions by the court the transaction costs can be quite a bit less.[citation needed]
Deeds of trust to secure repayments of debts should not be confused with trust instruments that are sometimes called deeds of trust but that are used to create trusts for other purposes, such as estate planning. Though there are superficial similarities in the form, many states hold deeds of trust to secure repayment of debts do not create true trust arrangements.[citation needed]
Mortgage lien priority: "title theory" and "lien theory"
Except in those few states in the United States that adhere to the title theory of mortgages,[11] either a mortgage or a deed of trust will create a mortgage lien upon the title to the real property being mortgaged. The lien is said to "attach" to the title when the mortgage is signed by the mortgagor and delivered to the mortgagee and the mortgagor receives the funds whose repayment the mortgage secures. Subject to the requirements of the recording laws of the state in which the land is located, this attachment establishes the priority of the mortgage lien with respect to most other liens[12] on the property's title.[13] Liens that have attached to the title before the mortgage lien are said to be senior to, or prior to, the mortgage lien. Those attaching afterward are said to be junior or subordinate.[14] The purpose of this priority is to establish the order in which lien holders are entitled to foreclose their liens in an attempt to recover their debts. If there are multiple mortgage liens on the title to a property and the loan secured by a first mortgage is paid off, the second mortgage lien will move up in priority and become the new first mortgage lien on the title. Documenting this new priority arrangement will require the release of the mortgage securing the paid off loan.
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