Strategic Mortgage Planning: Mortgage Interest, Mortgage Payments, and Mortgage Rates
At PDX Home Loan, we believe the preliminary strategic planning portion of the mortgage financing decision is typically an afterthought for borrowers. Clients are far too focused on the “best credit score for mortgage rates” and other assumed mortgage bellwethers without looking at the entire home loan picture.
This financial investment will play a crucial part in your daily life for years with far reaching ramifications. Your monthly mortgage payment will influence everything from your immediate lifestyle and travel plans to cash position and long-term savings goals. Unfortunately, most mortgage consumers move into the financing decision without understanding all of their options. That is why home loan strategic planning is so critical beforehand.
That said, while we don’t make the lending rules, we can tell you how the game works, without all of the excess noise and pitchman nonsense. Following the financial crisis, the lending market — marred with red tape and stipulations — is more nuanced than ever. We’ve helped helped thousands of families understand the business and use these tools to create added return on their real estate investment and we look forward to doing the same for you!
It’s never fun to see how the proverbial mortgage industry sausage is made, but these inner workings are central to US lending, and consequently to your home loan. We field countless technical financial inquiries every day, but let’s start with the million dollar question: What determines mortgage rates anyway?
According to Bonini’s Paradox, as any model becomes more complicated, it too becomes less predictable. Unfortunately, in today’s lending world, the synergies of global finance are a prime example of this phenomenon. Nonetheless, there are telltale signs and warnings to heed as a borrower or potential borrower.
For example, in December 2017 the Federal Reserve raised its benchmark interest rate, marking the fifth time it had done so since what we now call the Great Recession. From a lending perspective, this demonstrated loud it clear that the Fed would continue its strategy of raising interest rates (fearing headlong inflation) for the foreseeable future. As a result, the listed 30 year fixed mortgage rates and 15 year fixed mortgage rates followed the Fed’s lead.
So, what’s to be done? Let’s start with the overarching mortgage interest big picture and work our way in through all of the idiosyncrasies. Average mortgage interest rates vary based on 15- and 30-year predictions, as well as year-to-year adjustments, but are mortgage interest rates likely to go up in the immediate future? Is now a good time to lock one in?
That’s a great question! Let’s take a look…
Tips to Ensure Accurate Calculations:
Simple Calculation For a simple calculation, such as the 20 percent down purchase, put in the Purchase Price, and then enter “20” into the Mortgage Down Payment slot. The Mortgage Calculator will then automatically calculate your correct loan amount.
If you are unsure of the exact numbers, you should default to 1.2 percent of the Purchase Price. For example, if you are looking at a $200,000 purchase, you can estimate the taxes to be $2,400 per year. Plug this number into the mortgage calculator.
$500 per year is a fairly safe place holder. Increase it to $700 for purchases above $400,000.
Mortgage Insurance/FHA Mortgage Insurance
Mortgage insurance is not available for down payments of 20 percent and above. However, if you are putting less than 20 percent down, you will need to plan on paying for mortgage insurance. Mortgage insurance factors for different down payments:
5 percent down = .59 PMI per year
10 percent down = .3 PMI per year
15 percent down = .24 PMI per year
Federal Housing Administration
If you are getting an FHA loan, you will use a down payment of 3.5 percent, and in the MI section, you will add .85 for the annual factor.
MORTGAGE INTEREST RATES CHANGE: LOCK IN A LOW MORTGAGE INTEREST RATE TODAY
After several years of relative calm, with more-or-less steady global financial markets, we are now witnessing a bit of volatility is US financial markets. Is this the end of the calm before another financial fervor, or a mere fluctuation? Before we get ahead of ourselves, let’s take a look at the data (both historically and scientifically).
In April of 2018, the 10-year Treasury yields hit the 3 percent threshold. All market jitters aside, many analysts believe these rates will remain at this level or fall in due time.
There is, however, speculation — and speculation is all we have — that the Fed may increase these rates again this year. There’s even potential for further spikes in 2019. As stated by Ethan S. Harris, an economist with Bank of America Merrill Lynch, “There is no such thing as a painless Fed hiking cycle.”
Fed hikes ripple through economies for years after the fact.
In short, yes, the time to invest and act is now.
Based on current MBA Mortgage Rates and MBS Home Value Projections, those in the market for specific types of mortgages (especially those seeking a condominium) could spend thousands of dollars more by failing to act now or going all-in after another predicted set of Fed increases.
Again, the markets swing from time to time — that’s just the nature of free market trading. However, long-term trends and fundamental market shifts are far more reliable bellwethers of future interest rates than any day-to-day movements. In fact, just a few years ago, it wasn’t uncommon to see the markets sway 5 percentage points at a time.
WHAT'S THE AVERAGE MORTGAGE DOWN PAYMENT? THAT DEPENDS...
Now, all of this data brings us to the vital question we field multiple times a day: “How much will my home loan down payment be?” That is a very important question. While some buyers are only capable of making the minimum mortgage down payment, others may have a little more financial leeway. At PDX Home Loan, we need to understand the value of both the money you are investing as well as the money you are not putting into the real estate over time. This allows us to measure these long-term investments and also the tax adjusted cost of borrowing.
So what’s the latest on how down payments are calculated?
Based on your credit history and the home loan type, the down payment will adjust on a sliding scale. Some FHA loans incorporate mortgage plans with down payments as low as three percent. However, depending on the loan, the mortgage down payment will generally be somewhere between 5 and 20 percent of the total purchase.
In actuality, most down payments are well below 20 percent, and this is especially true for first-time buyers. Fun Fact: According to the National Association of Realtors, the average mortgage down payment for 60 percent of first-time buyers is 6 percent or less.
To assist you with your home loan aspirations, we have calibrated our very own mortgage calculator with a built-in home loan down payment calculator to help you accurately calculate mortgage payments.
A BETTER MORTGAGE CALCULATOR: HOW TO CALCULATE MORTGAGE COSTS
While exceedingly useful, mortgage loan calculators can be both a blessing and a curse. Many traditional mortgage calculators are difficult to use accurately and therefore often produce incorrect projections. Running the numbers and showing a client what they want to see is very different from showing a client what they need to see.
The whole purpose of a mortgage calculator is to project your monthly mortgage payment as accurately as possible. (This could be a payment on a home loan or refinancing payment.) A well-designed mortgage calculator does just that, so that you can plan for the future from an informed perspective. After all, we are dealing with your hard-earned money and livelihood.
Our Mortgage Calculator has been rigorously tested, and we are so proud to present the final product to you that the Portland Home Loan Mortgage Calculator is listed on virtually every single page of our website. Unlike the competition, our model automatically includes all associated expenses related to your mortgage, including but not limited to property taxes and homeowner’s insurance.