How Are Interest Rates on Loans for Homes Calculated?

One of the most pressing concerns for first time buyers of homes is understanding how interest rates are determined. While most new buyers of homes understand that the mortgage interest rate will directly affect their monthly payments, there’s still a lot of confusion about how the rate is determined to begin with. Here are the basics, and how to can use this information when looking at homes to buy.

How Does the Federal Reserve Impact Mortgages on Homes?

Basically, the Federal Reserve is the entity that determines the interest rates that banks charge each other when they borrow and loan money. How does this affect the amount of interest your mortgage lender charges you? Well, it’s the basis for the prime lending rate, or the interest that banks charge their most reliable customers. Prime is usually about 3% above the bank rate. If you loan is somehow tied to the Prime Rate then this will have a direct impact you. Prime is not the rate most loans are tied to however. Prime is usually associated with Home Equity Lines of Credit.

The more common purchase money and rate and term refinance mortgages, 30 and 15 year fixed for example, are priced completely differently. These loans are more closely tied to supply and demand of the 10 year treasury bond and the correspnding yield. If demand fades, bond dealers have to lower their price of a bond to sell it on the open market. When the price of the bond is reduced, the income stream (interest payments) remains the same and becomes a higher percentage of the bonds value (yield). Here is an example: a $1,000 bond pays $50 a year (5%). If a buyer is concerned about inflation in the economy getting close to the 5% number….he is going to want a bigger return on his investment so his demand for a $1,000 5% bond is going to reduce. A seller of that bond might have to reduce the price to $900 in order to sell it. The %50 dollar a year interest payment against a $900 price is 5.56% yield which would hopefully attract the buyer.

When the market is such that demand for bonds is decreasing because of inflation concerns for example, yield requirements are going to be going up and this will also push up the rates offered by mortgage lenders as, just like bonds, mortgage loans are sold in much the same way bonds are sold…..they are bundled together and sold as mortgage backed securities. So when you hear the phrase “The Fed Lowered the Rate” or “The Fed Increased rates” understand that this may not affect the typical mortgage rate pricing.

There are other factors that can influence mortgage rates. The most common factor is what is called “Risked Based Pricing”. Risked Based Pricing is pricing that takes into account the FICO credit scores of the borrowers. The lower the scores the higher the risk and the higher the mortgage rate. Yes, when it comes to lending- credit scores are king. From the lenders point of view, the best indicator of whether or not you will honor the terms of your home loan are how well you have dealt with past creditors. If you don’t already know your FICO (Fair Isaac Corporation) score, you need to become very familiar with this number. It’s determined by your credit history, amount owned, how often you apply for cards, length of credit history, and mix of credit types. You want the highest FICO score possible. If it’s low you need to read about ways to improve your credit score. This will increase the number of homes available to you. Mortgage rates can also be influenced by the region the property is located in. For example, California and Florida have traditionally held dubious distinctions of generating more mortgage fraud (and therefore loss) than other states. So as a result mortgage pricing for Florida and California loans typically are higher than a state like Virginia.

Mortgage rates can also be influenced by the region the property is located in. For example, California and Florida have traditionally held dubious distinctions of generating more mortgage fraud (and therefore loss) than other states. So as a result mortgage pricing for Florida and California loans typically are higher than a state like Virginia.

What this means for buyers of homes is that your individual rate is determined by the spread of rates in your area. Your mortgage lender will set your interest rate based on these key factors: your credit history, income, outstanding debt, and the types of loans for homes you are seeking. Your income and outstanding debt will impact your interest rate when obtaining your homes mortgage. In many situations using cash on hand to pay off debt, rather than making a larger down payment, can lower your interest rate.

Finally, the type of home loan you seek will influence your homes mortgage rate. The traditional 30-year conventional mortgage is likely to have a higher interest rate than an ARM (adjustable rate mortgage). Of course, the ARM is subject to change, so it’s a bit riskier. You will want to consult a mortgage lender to determine what type of home loan is best for your personal situation.

First time buyers of homes and seasoned pros need to know how interest lending rates are determined to getting the best rate possible. For questions please contact [email protected]

Computer Built Home Energy Saver Programs

In these days of computer and internet, every work can be performed resorting to information technology. One such program is the home energy saver that has been built on the computer program DOE-2. Basically the device is meant for analyzing and designing energy analysis for heating and cooling of buildings.

What It Does

Home energy saver performs the following tasks.

• Thermal load simulation accounting for each of the cooling as well as heating equipments at home.

• Calculates thermal distribution, thermostat management, and infiltration.

• Maps the zip codes entered by the user and match it with over 300 weather tapes that are unique in nature.

• Impose the cooling and heating condition ideal for the home for one long year.

Extension of DOE-2 Model

In essence, home energy saves is an extension of DOE-2 in various ways. The basic objective is improvement of the simulation model. Users can enhance the predictive power of the device by entering the actual electrical tariff being paid by them on a monthly basis. In addition; the use of energy by water heating and lighting appliances, fans, and others are also taken into consideration. Once the tasks are accomplished the device documents them in a comprehensive manner.

Recommendations for Quantifying Benefits of Energy Efficiency

One of the greatest advantages of the device is that it enables the users to quantify benefits of improvements made in the field of energy efficiency and enhancement of comfort levels of the home users. Some of the recommendations for energy efficiency and making the environment green are as follows.

No Cost Changes Where No Cost is Involved

• Changing the manner of use of energies.

• Lowering the temperature of water heaters.

• Unplugging the devices that are not really in essential use.

• Programming the thermostats a little lower.

Low Cost Changes Where Little Cost is Involved

• Using incandescent light bulbs instead of compact fluorescent lamps.

• Using LED bulbs.

• Wrapping water heater in an insulating blanket.

• These changes can be effected without expert support.

Expensive Upgrades where Substantial Expenses are Involved

Some of the steps taken for energy efficiency and creating green house environment are upgrading the energy levels. Such upgrading may involve change of inefficient and older appliances using newer energy star appliances or replacement of total systems in any case.

Even without much expenses, the home can be turned eco-friendly.

Lower Your Nursing Home Expenses by Utilizing TFSA’s

As the average age for seniors continues to increase, individuals and families are concerned with the rising costs of long term health care and of nursing homes. Approximately 2/3 of all adults will require long term health care assistance at some point during their lifetime, causing this expense to be a concern for most Canadian families. But, with the ability to save into a TFSA beginning in 2009, many families are optimistic about its ability to lower potential nursing home costs for themselves and their family members.
The most obvious benefit of a tax free savings account is that it offers the ability to provide current income that is tax free along with the lack of capital gains taxes or dividend taxes. As there is not a current annual income requirement associated with being able to utilize this investment, it is open to any Canadian over the age of 19.
A large percentage of Canadian nursing homes calculate the maximum daily living expense based upon the resident’s prior year’s taxable income. So, the larger the annual taxable income, the higher the eligible daily rate charged to the individual. In addition to the resident’s annual taxable income, their old age pension plan and any applicable old age supplement income are factored into determining what the minimum rate per day is. While the minimum amount cannot be changed by the individual, the maximum amount can be influenced.

The TFSA allows for the individual’s taxable income to be reduced as the money withdrawn from these accounts is non-taxable. If enough of an individual’s income is derived from a TFSA, the total maximum amount charged by a nursing home can also be reduced.

Another benefit of a TFSA in relationship to nursing home costs relates to annual income received. Because the income received from tax free savings accounts is tax free to the recipient, the total income received by the individual or the household does not change, even though their taxable income has been reduced. So, the same quality nursing home care and household income or lifestyle will remain unchanged.

There are not current income requirements for an individual to be eligible for saving into a tax free savings account. What this means is that money contributed into accounts can be derived from either current income or other assets. Aging adults can begin to transition funds from taxable accounts into tax free savings accounts up to the annual maximum limit. And, as the annual contribution limit continues to increase annually, the amount eligible to be transferred will also increase giving an even greater opportunity to take advantage of these financial benefits.
In addition to being able to transfer current assets into the account, the tax free savings accounts can be replenished. So, if the account balance is drawn down, it can be refilled again and again. This flexibility is not available in most other investment accounts.
Overall, there are a tremendous amount of benefits to seniors in nursing homes or who may require this type of assistance by utilizing the new tax free savings accounts.