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Two Primary Measures of Mortgage Risk

Know your mortgage
An adjustable-rate mortgage, for example, may offer low initial monthly payments based on the current interest rate, the monthly payments have the potential for a significant increase in the future if interest rates rise. A payment option mortgage can offer very low initial monthly payments when deferred interest is added to the principal balance of the mortgage, but triggers exist that can cause monthly payments to rise suddenly. A homeowner would likely face decline by serious financial problems as housing prices, while principal balance of the mortgage increases. The key to making a sound financial decision about choosing a mortgage is to both identify and measure the risks of the mortgage and then ask, “Are the risks worth the reward?” and “Can the risks associated tolerated with a bad result?

Two primary measures of the Mortgage Risk
There are two main risks associated with choosing a mortgage that must be identified and measured: the risk of payment shock and the effect of a mortgage home equity.

payment Shock
Payment shock is the term used to describe the probability of substantial monthly payment increases. Payment shock is generally associated with adjustable rate mortgages. It is the result of the expiration of a temporary starting speed or fixed rate period, increasing fully indexed interest rate, the end of a grace period for payment or the revision of a pay option arm minimum payment.

All adjustable rate mortgages carry some risk of payment shock. Many have the above mentioned features, which add to this risk. For example, 3-2-1 or 2-1 buy-downs provide an overview of the first temporary starting prices; as lapse rates, increasing the monthly payments. Fixed-time arms have a fixed rate for a certain period of time, usually three, five or seven years. Since the fixed interest period expires, the monthly payments are likely to increase.

Interest only mortgages can offer lower initial payments because the monthly payment consists of interest only; When the grace period expires, will increase the monthly payment. Some mortgages, such as the so-called payment option ARMs, offer very low initial monthly payments, but also have triggers that can lead to substantially increase the payment. (To keep reading about ARMs See American Dream Or Nightmare Mortgage? Armed and dangerous and mortgages. Fixed-Rate Versus Adjustable Rate)

Home Equity
Home equity is a measure of the intrinsic value of a property to the homeowner. The creation of home equity wealth building and opens additional financial benefits and financing. However, the destruction of home equity can also severely limit future financing options.

Understanding probable effect of a mortgage home equity on a planned time horizon is important to future financial considerations. A major risk measure used by lenders is the size of the loan relative to the value of the property. This is known as the loan-to-value ratio. If home equity is destroyed, the loan-to-value ratio increases. This can make it harder to refinance an existing loan, requiring that new funding be made higher yields require payment of private mortgage insurance, or require the use of a different type of mortgage. In a worst-case scenario, if the value of a home falls below the remaining principal balance of a mortgage, all funding effectively eliminated. (To keep reading about this topic, see Mortgages. How much can you afford?, Paying off your mortgage and Graves from personal debts)

In traditional lending, the mortgage part of each month will be applied toward the principal balance of the mortgage based on a repayment schedule. However, many new mortgages that have become popular in recent years, offering such features as interest-only payments or payments that are less than the interest-only payments. When an interest payment is made, the remaining principal balance of the mortgage remains constant. When a payment is less than the interest-only payment is made, postponed created interest. Deferred interest is then added to the principal balance of the mortgage. This is known as negative amortization. The principal balance of the mortgage actually increases! When the mortgage principal balance of one remains constant or increases, home equity may remain constant or may be destroyed, depending on the speed of home price appreciation. Because home equity an important role in the future funding considerations played, the home equity pace of creation should be a key part of a mortgage decision. This is especially true grace and negative amortization mortgages because most borrowers opt for these loans with the intention of refinancing them within a certain time horizon.

Making estimates
Correctly measure the risk of payment shock and home equity inherently requires making estimates of future interest rates and home price appreciation. These estimates should be based on the most likely or likely outcome. They should not be based solely on the best or worst-case scenarios. These calculations can be made for mortgage payments and home equity.

Calculating Home Equity
Home equity is a function of two things: the speed at which the market value of a property or written off and the remaining principal balance of a mortgage. (Home equity is equal to the value of the home minus principal balance of the mortgage’s). The rate at which homes appreciate or depreciate varies from state to state, city to city and even from district to district in the same city. There is no single, foolproof way to make an estimate of future home price appreciation. However, the recent performance of the past and a tendency to return to appreciation rates to their long-term average some guidance. For example, if a house appreciated 10% in the previous year, but in the long-term average is 5%, 7% is a good estimate for the following year (6% might be a good estimate for the following year, and 5% a good estimate for the remaining years).

 

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