Philip P. answered • 10/23/17
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I = P·r·t
- I = interest = half the principle = P/2
- P = principle
- r = rate
- t = time = 4 years
I = P·r·t
(P/2) = P·r·4
Solve for r. Convert the fraction to a decimal and multiply by 100 to convert to a percent.
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Aldrin A. Thank you! Report 10/23/17
Answer:
12.5%
Step-by-step explanation:
Define x:
Let the principal amount be x
Find the total interest gain:
Interest = 50% of x = 0.5x
Find the interest gain inn 1 year:
4 years = 0.5x
1 year = 0.5x ÷ 4 = 0.125x
Find the interest rate:
Interest rate = interest / principal x 100
Interest rate = (0.125x ÷ x) x 100 = 12.5%
Answer: The interest rate is 12.5%
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Mortgages Guide
Purchasing a home and taking on the mortgage loan can be intimidating, especially for first-time buyers. The process requires a firm knowledge of your personal finances and a long-term financial commitment. This basic information will help you start with confidence and find the best lender for you.
If you need more guidance during the home buying process, a professional mortgage banker or mortgage broker might be able to help.
How Do Mortgages Work?
Mortgages are secured loans that use the value of the home you’re buying as collateral.
Loans are secured with a down payment. Down payment requirements vary by lender. Borrowers typically need 20% of the purchase price to avoid private mortgage insurance. However, it is often possible to get a loan with as little as 3% down.
Mortgages are repaid over time with interest, and loan terms can run from eight to 30 years. Most Americans need a mortgage to afford a home. The drawback of a mortgage is if you’re unable to make your monthly payments, the lender can seize the property.
If you’re already a homeowner and thinking about refinancing your mortgage, check our mortgage refinance calculator and our list of the best mortgage refinance companies to get started.
Types of mortgage loans
To fit the diverse needs of homebuyers, mortgage companies offer products with a range of lengths, interest rates and payment structures.
Conventional loans: The most common type of mortgage loan, conventional loans are offered by private lenders and not part of any government-insurance programs. Conventional loans can be conforming or non-conforming.
- Conforming loans meet the standards to be purchased by Fannie Mae and Freddie Mac, which are government-sponsored mortgage investors.
- For 2022, the conforming loan limit is $647,200 in most places. In some expensive areas, the limit goes up to $970,800.
- Non-conforming loans are those that do not meet these standards and therefore stay on the private lender’s books.
Jumbo loans: Jumbo loans are a type of conventional, non-conforming loan for loans above the conforming loan limits of $970,800.
FHA loans: A Federal Housing Administration is a government-backed mortgage program popular with first-time buyers.
- The government offers the lender insurance on this type of loan, so FHA mortgage rates tend to be lower than conventional loans.
- You can also make a lower upfront down payment with this type of loan, typically as low as 3.5% of the purchase price.
VA loans: Another government-backed loan, VA loans are guaranteed by the US Veterans Affairs Department. VA loans are available to service members, veterans and eligible surviving spouses.
- They often come with lower interest rates and don’t require a down payment or private mortgage insurance. However, it requires a VA funding fee. For more information about VA loans, check out our guide to the best VA loans.
USDA loans: The US Department of Agriculture backs home loans for low-income borrowers purchasing real estate in rural and some suburban areas. No down payment is required, and the program offers competitive interest rates, flexible credit score requirements, and low monthly mortgage insurance.
Reverse mortgage: A reverse mortgage allows homeowners age 62 or older to convert their home equity into cash without having to sell their property.
- As long as the homeowners live in the house, they don’t have to pay back the loan — however, there are caveats, such as having homeowners insurance and maintaining the property in good condition.
- Instead of a reverse mortgage, homeowners under the age of 62 can also look into home equity loans, which are similar in concept, though with different repayment rules.
Type of mortgage rates
When looking for a loan, always look at the most current mortgage rates and the APR being offered by the lender to make sure you’re getting the best rate. Borrowers who can qualify for a lower rate will save money on their loan over time.
The annual percentage rate (APR) is a measure of both how much interest you will pay throughout the year and any applicable loan fees, including loan origination and underwriting costs. This is expressed as a percentage of your principal loan amount.
Lenders typically offer both fixed-rate mortgages and adjustable-rate mortgages.
Fixed-rate mortgages
Pros
- Interest rate doesn't change over the life of the loan
- Predictable monthly payments
- Ideal for long-term homeownership
Cons
- Higher interest rates than adjustable-rate mortgages
- Harder to qualify for when interest rates are high
Adjustable-rate mortgages (ARM)
Pros
- Lower interest rates during fixed-rate period
- Ideal for short-term homeownership
- Easier to qualify for higher loan amounts
- Interest rates may go down throughout the life of the loan
Cons
- Monthly payment amounts can change multiple times over the life of the loan
- Interest rates can potentially double in the span of a few years
How to Get a Mortgage Loan
Your first step toward getting a home mortgage loan is to determine your budget. Check our mortgage calculator and home affordability calculator to see how much you’ll be able to afford in monthly mortgage payments and get an estimate of your ideal purchase price.
Part of determining how much home you can afford is figuring out your down payment. As a general rule of thumb, a 20% down payment is recommended because you’ll avoid paying for private mortgage insurance (PMI) — a policy which will protect the lender in case you default on the loan. Most lenders, however, will accept a lower down payment.
Before applying for a mortgage, make sure to check your credit score. Lastly, check your debt-to-income ratio before applying. Lenders prefer borrowers with a debt-to-income ratio lower than 36%, and many lenders will not even consider borrowers with a ratio higher than 43%.
It is also important to compare mortgage lenders to make sure you find the one with terms that best fits your financial situation. Once you’ve decided on a lender, gather all the necessary paperwork to help streamline the application process.
Documents needed when submitting a mortgage application include:
- Your two most recent pay stubs
- Your most recent tax return
- W-2 and/or 1099 (lenders may ask for two years, depending on your employment history)
- A state-issued photo ID, such as your passport or driver’s license
- Statements of all your assets (retirement accounts, investment accounts, checking and savings accounts, etc.)
- Bankruptcy discharge documents (if applicable)
- A recent credit report (typically obtained by the lender)
- Records of any outstanding debts, such as credit cards and student loans
- In some cases, lenders may require additional documentation, like a history of alimony payments and gift letters, so make sure to ask before applying
Lenders will perform hard credit inquiries when you apply, making sure there are no red flags in your credit history that may impact your chances of approval. If you apply with multiple lenders within 45 days, your score will not be affected. Credit reporting agencies recognize this as shopping around for the best mortgage rate.
Another good idea is getting a mortgage pre-approval before deciding on a property. Getting a pre-approval letter will save you time and make the mortgage process more manageable.
It is important to note that student loans count against your debt-to-income ratio, which can make applying for a mortgage a tricky proposition for many individuals. However, getting a mortgage when you have student loans is not uncommon, so make sure to thoroughly explore all of your bank’s options to secure the best rates.
Once you’ve submitted your application, the lender will generally provide you with a loan estimate within three business days. The loan estimate is a document that outlines the preliminary terms of the loan you have requested.
Latest News on Mortgage Lenders
A better than expected inflation report in November gave experts hope that mortgage rates may stabilize over the coming months. As a result of the news, Freddie Mac’s benchmark rate has dropped by more than half a percentage point since climbing as high as 7.08% earlier in the fall.
For borrowers with less than stellar credit, however, current mortgage rates remain well above 7% and continue to hurt housing affordability, especially for first-time homebuyers. To counteract the effect of high rates, many borrowers are turning to creative strategies to help bring both interest rates and monthly payments within reach.
Home sellers are also being affected by high rates and in multiple ways. Selling now potentially means having to buy at a much higher interest rate than their current mortgage. For others who still want or have to sell, there are fewer buyers in the market. This has led to sellers negotiating and making more concessions, such as temporary rate buy downs, to lock up a sale.
Homeowners who put off refinancing when rates were low are also feeling the pinch of higher mortgage rates. For most homeowners, refinancing no longer makes sense because it would mean changing their current low rate for a higher one. For those who still have to refinance, shopping around with different lenders can help locate the best rate.
Mortgage Lenders FAQ
To answer the questions in this section, we contacted Tim Lucas, managing editor for The Mortgage Reports; Jason Sharon, mortgage broker, US Navy Veteran, and owner of Home Loans, Inc; and Andy Harris, owner of Vantage Mortgage Group, Inc.
When will mortgage rates go down?
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Mortgage rates have been trending lower over the past few weeks after hitting a high of 7.08% in early November. What is not clear is how quickly and by how much rates will decrease. Borrowers should expect rates to remain between 6% and 7% for the foreseeable future.
What credit score do mortgage lenders use?
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The FICO scoring system is most commonly used by mortgage lenders. There are many different versions of FICO Scores. Each of the three credit reporting bureaus — Experian, Transunion and Equifax — will use a different version when it comes to mortgages: FICO 2, FICO 4 and FICO 5, respectively. However, the Federal Housing Finance Agency recently announced that all lenders will be required to phase in the VantageScore 4.0 model, in addition to the FICO 10T score, over the next few years.
Individual lenders will require a minimum credit score that can range between 580 and 660, depending on the type of mortgage (Conventional, FHA, VA, etc) being applied for.
How long does it take to get a mortgage preapproval?
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Obtaining a preapproval letter can take as little as a day and as long as 10 days, depending on what lender you choose. Some lenders may issue the letter with a simple credit check based on the information you provide while others may require to see documentation such as pay stubs, W-2s, and bank statements.