Don’t Be Fooled. Mortgages Are Different from Every Other Kind of Loan

Getting a mortgage is equivalent to pledging at least the next 30 years of your life’s earnings to own a house. There are traditional fixed interest mortgages and flexible interest mortgages as well. Depending on what your financial standing is, a mortgage loan could be a blessing or a curse. However, in general, a person with a good financial health will be able to handle these low rate loans with ease.

Problems only start when you start equating mortgages with other types of loan. The truth is, mortgages are different from every other kind of loan you can get. They are long term obligations. Here is a common myth associated with mortgages.

Fed rate cuts directly affect mortgages

When the Federal Reserve plans to cut interest rates, it does so in order to induce short term lending and boost consumption. This has a major effect on shorter-term loans like credit cards and even car loans. However, mortgages aren’t directly affected by this, simply because they are very long-term loans. If you have a traditional mortgage with fixed interest rate, you may not even have to bother about the changes.

However, if you have a flexible interest rate, then any change in interest rates by the Feds should be noted by you. Most lenders will provide you caps on flexible interests. However, they will still be increasing your loan burden. This is precisely what happened when the housing market crashed in 2007.

The Federal Reserve increased the interest rate which made millions homeless in just one sweep. Almost all homeowners who had to foreclose their homes were using flexible interest rates on subprime loans that sparked a massive financial crisis in the country.

Anybody who tells you that the Fed numbers are going to make a major difference to the mortgage rates is not lying to you, but is certainly misleading you.

Mortgage rates are based on MBS

The Federal Reserve rates or the 10-year Treasury note has very minute effect on the mortgage sales. These loans and their interest rates depend on the mortgage-backed securities or MBS. A fluctuating in this MBS will lead to a fluctuation in the mortgage rates as well. Sometimes, the MBS could move in the opposite direction of the Fed interest rate.

Therefore, you have to be careful while shopping for a new home loan. If you keep an eye on the bonds market, you will likely always make a wrong decision with home buying and mortgages.

The truth is that markets are always moving at a very rapid pace and it is difficult to keep pace with the changes. A smart home buyer only focuses on the indicators that are important to his purchase decisions. If you can see that the MBS is moving in a positive direction, buy a new home. If not, wait till it does.

Remember, a mortgage will continue for the next three decades of your life and if you are in your 30s, you will only become a homeowner when you are nearing retirement. Save yourself from poor financial decisions and buy mortgages smartly.