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How Lenders Set Mortgage Rates

Many people who are looking for a mortgage want to know exactly how much they can borrow before they become involved in a mortgage. The fact is, banks and lenders use a variety of complicated factors to evaluate your ability to repay any loan.

Income and Cash Reserves Will Affect Your Eligibility
Lenders will take a look at your income to make initial determinations about your mortgage. Obviously a high income will help you qualify for more money in loans. However, banks and lenders also investigate your job security. If you’ve been working somewhere for a long time, you’re likely to be received favorably by lenders.

Many banks and lenders will also check to see what your cash reserves are. If you’ve got a checking account with a sizable amount of available funds, the bank will be more likely to offer you a high loan. They’ll also take a hard look at your credit history. People with good credit are likely to receive loans, while people with little to no credit will have a hard time even with a small bank loan. This is due to banks restricting their loan process during the economic crisis.

The Front-End Ratio and Back-End Ratio
Lenders will analyze something called the “front-end ratio.” The front-end ratio is actually a measurement of how much of your income will go to paying your mortgage. They want to make sure that your total payment doesn’t exceed 28% of your pre-tax monthly salary.

They’ll also take a look at the “back-end ratio.” The back end ratio is a number that refers to how much of your gross income will be needed to pay all debts combined. This will include all of your payments, such as your mortgage, car payments, alimony, etc.

Only Borrow What You Need
Remember, you don’t have to take every offer you get. If a lender agrees to lend you a sizable chunk, only take it if you absolutely need it. If often makes sense to borrow less money and put down a higher down payment on a home. Only sign a mortgage that you can afford, and that gives you the freedom to put away money for other expenses.

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You Should Refinance If…

With interest rates near all-time lows, many people would benefit by refinancing their mortgage. While many people could benefit from receiving a lower interest rate, many are swayed away from a mortgage refinance due to the lengthy and tedious process as well as the costs associated with refinancing. While many people try to avoid refinancing, there are various situations where you absolutely should refinance your mortgage.

The first situation when you should refinance your mortgage is if you could save money on your monthly payment. With the average 30-year mortgage rate around 5.10%, millions of people across the country could save considerably by refinancing their mortgage. Just a few years ago, the average 30-year mortgage rate was over 6.50%. If a person with a 30-year, $300,000 mortgage was able to reduce their interest rate from 6.25% down to 5.10%, their monthly payment would reduce from $1,264 down to $1,085, a savings of $179 per month. This would save over $64,000 in interest charges over the course of a 30-year mortgage.

Another situation when you should refinance your mortgage is if you plan on staying in your home for a long period of time. Due to the high rate of foreclosure and mortgage defaults, many mortgage lenders are forced to charge high origination fees to compensate for their risk. These fees often cost up to 2% of the principal borrowed. For example, a $200,000 mortgage refinance will often come with fees of around $4,000. Using the example from above, the borrower would not break even on the transaction for 22 months ($4,000 / $179 = 22.34 months) if they were to refinance. Therefore, if the borrower thinks that they will stay in their home for more than 22 months, then they should refinance their mortgage.

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What is Comprehensive Car Insurance?

For those looking for a new car insurance plan, deciding whether or not to purchase comprehensive car insurance can be a difficult decision. Comprehensive car insurance coverage is a level of coverage which insures a vehicle in the event of loss or damage that is not caused by a typical car accident or collision. For example, comprehensive car insurance covers loss or damage that results from incidents of fire, theft, attempted theft, weather damage, vandalism, or in the event that a driver make impact with an animal.

Depending on the location of where the car is kept, comprehensive coverage can be quite expensive. The cost of comprehensive coverage relies heavily on historical insurance rates of auto theft and vandalism. The overall replacement value of the car also has a large effect on the cost of comprehensive coverage. In some situation, adding a comprehensive coverage to an insurance policy could cost up to a third of the overall insurance policy.

Due to the high cost of comprehensive coverage, many people consider not adding that level of coverage. In some situations, adding comprehensive coverage may not be a good financial decision. If a driver has a car that is old, inexpensive, and would be easy to replace, then adding comprehensive coverage may not make sense. On the other hand, if the driver has a new car that still has a loan on it and would be expensive to replace, then getting comprehensive coverage may almost be a necessity. In fact, some auto loans require a borrower to carry comprehensive auto insurance coverage.

While comprehensive coverage is expensive, there are ways to reduce the monthly premiums. By increase their deductible, a driver could save considerably on the cost of comprehensive coverage. If the drive does increase their deductible, they should ensure that they keep the deductible in a liquid account in the event that they need to make a claim.