Factors that affect mortgage rates

Appraisal

Before the lender approves a mortgage, they will want to appraise the property to determine its fair market value. This lets the lender determine their risk in lending a borrower money to purchase it.

For example, should the property be worth less than the asking amount, then the lender could have a problem should the borrower default on the mortgage and the lender then becomes responsible for having to liquidate the property to get their money back.

Down Payment

To further reduce the risk the lender faces when accepting a mortgage client, the lender may ask the borrower to pay down some of the cost of the underlying property. This can reduce the mortgage payment to an amount and a frequency that the borrower can sustain.

Credit Worthiness

This can also affect the value of the morgtage. Should the lender determine that the borrower’s ability to maintain the mortgage is less than satisfactory, the lender may levy a higher interest rate for the mortgage in order to mitigate any potential negative situations.

Many aspects of a borrower’s financial situation could adversely affect their ability to repay, especially income and their debt to income ratio. A borrower with too many bills to pay and an income insufficient to include a given mortgage payment amount is a large risk. This is especially true with borrowers who want a variable mortgage rate. Should the rate go up, increasing the mortgage payment amount to a point beyond the borrower’s ability to pay, then the lender is at risk.

A property tax assessment by the city could also affect the property tax rate on the property, increasing the tax bill that the borrower must pay, which again, could extend beyond the borrower’s ability to pay.

Mortgage Standards

This changes from country to country and lender to lender, and market conditions may play a part, but the acceptable risk level is a property with a Mortgage Loan to Property Value ratio (LTV ratio) of 70 – 80%, with up to 30% of the borrower’s income dedicated to the mortgage payment.

For LTVs over 80% Mortgage Insurance is generally required and paid for by the borrower, either up front, at the end, or mixed in with the payment amount. The lender is obligated to remove the insurance when the LTV ratio has reduced to below 80%, either through property value appreciation, or the mortgage value has been sufficiently reduced by mortgage payments, or a combination of the two. Mortgage Insurance is NOT the same as Home Owner Insurance.

The Mortgage Insurance payments made by the borrower helps to mitigate any potential lost interest revenue or having to sell the property at a loss, should the lender have to foreclose and dispose of the property.