Understanding Risk Factors For Mortgages

It is important to understand that the less risk the borrower has in a purchase or refinance transaction (the less money you put down - or the higher the LTV), the higher the risk is to the investor who is funding the loan.

While there are exceptions, higher risk typically comes at a higher cost.

Why is higher risk at a higher cost?

• Think of it this way, when you invest your money in a high risk stock, you expect a higher rate of return - the opposite being true as well. The same thing is true for investors who fund home loans.

What are some factors that contribute to higher risk?

• Putting less than 20% down.
  • This risk is sometimes offset with an insurance policy called Private Mortgage Insurance (PMI). Learn more information about PMI, and how to avoid paying for it.
  • In particular putting less than 5% down causes a new level of risk with many home loans. In this case, not only might you pay a higher mortgage insurance rate, you might also pay an incrementally higher interest rate to offset the higher risk.
  • Exceptions exist. Please talk with your mortgage consultant for advice about which types of home loans are available to you. Your mortgage consultant should also be able to help you evaluate the comparative advantages and disadvantages within any given group of home loan solutions.
• Buying an investment property (meaning buying a house for the purpose of renting it) is considered a higher risk factor.
• Other risk factors are related to home loan solutions that fall into the "Type Four" and "Type Five" category loans. Should you need to utilize one of these solutions, you can expect to pay a higher interest rate for your new home loan.
• Some risk factors don't necessarily play directly into the cost of the loan, but may affect how difficult the qualifying factors are for the mortgage.
  • Condos, for example, are considered a higher risk type of property. There are many other high risk types of property. Please talk with your mortgage consultant about the type of property you are evaluating purchasing to ensure a home loan is available to meet your needs.