25 Aug 2023
By Kevin Gahagan
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What Is A Floating Interest Rate?

Mortgage

What Is A Floating Interest Rate?A floating interest rate, also known as a variable interest rate or an adjustable rate, is an interest rate that can change over time. Unlike a fixed interest rate, which remains constant for the entire duration of a loan or investment, a floating interest rate fluctuates periodically based on certain factors or benchmarks.

The advantage of a floating interest rate is that it can offer flexibility. When interest rates are low, borrowers can benefit from reduced interest payments. However, if interest rates rise, the cost of borrowing will also increase.

How Does A Floating Rate Work?

A floating interest rate works by adjusting periodically based on a predetermined formula or benchmark. Here’s a general overview of how a floating rate typically operates:

Selection of a Benchmark: When entering into a loan or investment agreement with a floating rate, a benchmark or reference rate is chosen. Common benchmarks include the prime rate, LIBOR, or a government bond yield. The benchmark serves as a starting point for calculating the interest rate.

Margin or Spread: In addition to the benchmark, a margin or spread is set. The margin remains constant throughout the loan or investment term and is added to the benchmark to determine the final interest rate. For example, if the chosen benchmark is 3% and the margin is 2%, the floating interest rate would be 5%.

Periodic Rate Adjustments: The frequency of rate adjustments is specified in the loan or investment agreement. The interest rate may be adjusted annually, quarterly, monthly, or even daily, depending on the terms. At each adjustment period, the interest rate is recalculated based on the current value of the benchmark.

The Pros And Cons Of Using A Floating Rate Mortgage Loan

Using a floating rate mortgage loan, also known as an adjustable-rate mortgage (ARM), has both advantages and disadvantages. Here are some of the pros and cons to consider:

Pros:

Initial Lower Interest Rate: One of the main advantages of a floating rate mortgage is that it often starts with a lower interest rate compared to a fixed-rate mortgage.

Potential for Future Savings: If interest rates decrease over time, borrowers with a floating rate mortgage can benefit from lower monthly payments.

Flexibility: Floating rate mortgages often provide more flexibility than fixed-rate mortgages. Depending on the terms of the loan, borrowers may have the option to refinance or sell the property without incurring significant prepayment penalties.

Cons:

Uncertainty and Rate Fluctuations: The main disadvantage of a floating rate mortgage is the uncertainty associated with rate fluctuations. The interest rate is subject to periodic adjustments based on market conditions, which means the monthly payment can change over time.

Potential for Higher Costs: If interest rates increase significantly during the loan term, borrowers may end up paying more in interest over the long run compared to a fixed-rate mortgage.

Limited Predictability: Unlike a fixed-rate mortgage, where the monthly payment remains constant throughout the loan term, a floating rate mortgage introduces uncertainty.

Refinancing Risk: If interest rates rise substantially, it may become more challenging to refinance the mortgage or obtain a new loan with favorable terms.

It’s essential for borrowers to carefully evaluate their financial situation, risk tolerance, and future plans before opting for a floating rate mortgage. Assessing the potential impact of rate fluctuations and considering long-term financial goals can help borrowers make an informed decision.

Consulting with a financial advisor or mortgage professional is recommended to fully understand the implications of a floating rate mortgage and determine if it aligns with your needs.

24 Aug 2023
By Kevin Gahagan
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What Are The Pros And Cons Of ‘No-Deposit’ Mortgage Deals For First-Time Buyers?

Mortgage

What Are The Pros And Cons Of 'No-Deposit' Mortgage Deals For First-Time Buyers?“No-deposit” mortgage deals for first-time buyers refer to mortgage options that allow buyers to purchase a home without having to put down a deposit or a down payment. Here are the pros and cons of such deals:

Pros:

Lower upfront costs: The most significant advantage of a no-deposit mortgage is that it eliminates the need for a substantial upfront deposit. This can be beneficial for first-time buyers who may struggle to save a large sum of money for a deposit. It allows them to enter the property market sooner.

Increased affordability: With a no-deposit mortgage, first-time buyers can purchase a home with a smaller amount of savings. This can make homeownership more accessible, especially in areas where property prices are high.

Potential investment opportunities: By utilizing a no-deposit mortgage, first-time buyers can allocate their savings toward other investments or use the funds for home improvements. This flexibility may provide opportunities for additional financial growth.

Cons:

Higher borrowing costs: No-deposit mortgages typically involve higher borrowing costs, including interest rates and fees. Lenders often consider these deals riskier, so they may offset the risk by charging higher interest rates or requiring additional insurance or guarantees.

Limited mortgage options: No-deposit mortgage deals are not as widely available as traditional mortgages. Lenders may have specific eligibility criteria or restrict the types of properties that qualify for these deals. The limited options can make it more challenging for first-time buyers to find a suitable mortgage arrangement.

Negative equity risk: By not providing a deposit, buyers immediately start with little or no equity in their property. If property prices decrease, there is a higher risk of falling into negative equity. Negative equity occurs when the outstanding mortgage balance exceeds the value of the property. This can be problematic if the buyer wants to sell or remortgage the property in the future.

Stricter eligibility criteria: Lenders offering no-deposit mortgages may impose stricter eligibility criteria. They may require a higher credit score, proof of stable income, or additional financial commitments. First-time buyers with a limited credit history or irregular income may find it more difficult to qualify for these deals.

Long-term financial implications: Opting for a no-deposit mortgage means taking on a higher level of debt. Buyers must carefully consider their long-term financial situation and ensure they can comfortably afford the mortgage repayments. Failing to do so could result in financial strain or difficulties in meeting future financial goals.

It is essential for first-time buyers to thoroughly research and assess their individual circumstances before committing to a no-deposit mortgage. Consulting with a mortgage advisor or financial professional can provide further guidance and help make an informed decision.

23 Aug 2023
By Kevin Gahagan

3 Ways To Avoid Mortgage Insurance

Mortgage

3 Ways to Avoid Mortgage InsuranceWhen you are buying a home, you may run into a number of hurdles to complete the purchase. One of the items that you may be asked to purchase is called private mortgage insurance, often shortened to PMI. This is a unique insurance policy that your lender, such as the credit union or bank, may ask you to buy in order to protect themselves. In this insurance policy, the bank protects themselves against losing money if you end up defaulting on your loan.

Unfortunately, if you are asked to purchase PMI, this will increase your monthly mortgage payment. Therefore, most people try to avoid it. Fortunately, there are a few ways to do this.

Increase the Size of Your Down Payment

Typically, the lender will ask you to purchase PMI if your loan to value ratio is off. In most cases, the lender will ask you to buy PMI if you put down less than 20 percent. It is important to remember that this is still handled on an individual case-by-case basis and each lender handles this differently. 

Invest in a Piggyback Mortgage

Another option to avoid PMI is to invest in something called a piggyback mortgage. In this case, you are splitting your mortgage into two policies. For example, if you put down 10 percent, you would need to take out a mortgage for the other 90 percent.

When you take out a piggyback mortgage, you split this 90 percent loan into one mortgage for 80 percent and the other for 10 percent. The drawback of this policy is that the second loan might have a higher interest rate than the first. This can help you avoid having to take out PMI.

Try Building the PMI Into the Loan

Finally, the last option is to roll them into the cost of the loan. In this case, the lender avoids asking you to purchase PMI and instead charges you a little bit more money for the loan. You won’t have a section on your bill for “private mortgage insurance” but you will have a slightly higher monthly payment anyways. Remember that you can refinance to a lower rate later, saving some money; however, it might be harder to eliminate PMI.

Avoiding Mortgage Insurance

These are a few ways that you can avoid purchasing PMI. This will help you keep your monthly payments low. As always, speak with your trusted mortgage professional for personal advice on your specific situation.

22 Aug 2023
By Kevin Gahagan
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Reasons You Need an Insurance Binder and How to Get One

Mortgage

Reasons You Need an Insurance Binder and How to Get OneAn insurance binder for mortgage loans is a document that provides proof of insurance coverage for a property that is being financed with a mortgage loan. Mortgage lenders require borrowers to have insurance coverage on their property to protect their investment in case of damage or loss.

When a borrower applies for a mortgage loan, the lender typically requires proof of insurance coverage before they will approve the loan. An insurance binder is a document issued by the insurance company that provides temporary proof of insurance coverage until the official insurance policy is issued.

The insurance binder for mortgage loans will typically include information about the property being insured, the coverage limits, and the effective date of the policy. The lender will review the insurance binder to ensure that it meets their requirements for coverage and will usually require the borrower to maintain insurance coverage for the duration of the mortgage loan.

Here are some reasons why you may need an insurance binder:

Closing on a new home: If you are closing on a new home, your lender may require an insurance binder to ensure that the property is adequately insured.

Purchasing a new car: If you are purchasing a new car, you may need an insurance binder to show proof of insurance coverage before you can take possession of the vehicle.

Starting a new business: If you are starting a new business, you may need an insurance binder to show proof of coverage for liability, property damage, or other types of insurance coverage.

Renting a property: If you are renting a property, your landlord may require an insurance binder to ensure that you have renters’ insurance coverage.

To get an insurance binder, you will need to contact your insurance agent or insurance company. They will typically require you to provide some basic information, such as your name, address, and the type of coverage you need. Once they have this information, they will issue a temporary insurance binder that will provide proof of coverage until the official insurance policy documents are issued.

It is important for borrowers to understand that an insurance binder is a temporary document and should not be used as a replacement for the official insurance policy. It is also important to review the insurance policy carefully to ensure that it provides the necessary coverage for the property being insured.

21 Aug 2023
By Kevin Gahagan

What Do Appraisers Consider When Valuing a House?

Mortgage

What do Appraisers Consider When Valuing a House?Appraisers consider several factors when valuing a house to determine its fair market value. The goal of the appraisal is to provide an unbiased and accurate assessment of the property’s worth.

Here are the key factors appraisers consider:

Location: The location of the property is one of the most critical factors in determining its value. Proximity to amenities such as schools, shopping centers, parks, public transportation, and the overall desirability of the neighborhood can significantly influence the value.

Size and layout: The square footage and layout of the house play a crucial role in its valuation. Larger houses generally have higher values, but the layout and functionality of the space also matter.

Condition: The overall condition of the property, including both the interior and exterior, is essential. Appraisers look for signs of wear and tear, structural issues, and the general maintenance level of the house.

Upgrades and renovations: Recent upgrades and renovations can positively impact the value of a house. Appraisers take into consideration improvements such as kitchen upgrades, bathroom remodels, flooring changes, or any other updates that enhance the property’s appeal and functionality.

Comparable sales (comps): Appraisers use comparable sales data from recently sold properties in the same or similar neighborhoods to establish a benchmark for the subject property’s value. They compare factors like size, age, condition, and location to determine the market value.

Market trends: Appraisers consider the current real estate market conditions. If it’s a seller’s market with high demand and limited supply, the property’s value may be higher, and vice versa.

Age and condition of the property: The age of the house and its overall condition, including the age and condition of the roof, HVAC systems, and major appliances, will be assessed. Newer and well-maintained properties tend to have higher values.

Lot size and landscaping: The size and quality of the lot, as well as the landscaping and curb appeal, can influence the property’s value.

Views and natural features: Properties with attractive views or access to natural features like waterfronts, mountains, or green spaces may have higher values.

Environmental factors: Appraisers also consider any environmental issues or hazards that might affect the property’s value, such as proximity to industrial sites, flood zones, or other potential risks.

It’s important to note that the appraisal process may vary slightly depending on the specific regulations and guidelines in a particular region or country. Appraisers must remain objective and follow professional standards to provide an accurate and impartial valuation of the property.