My Personal Finance Blog

So many people want to predict where the mortgage rates are going. After all, even a single percentage point of movement in mortgage rates can and will affect other rates in the market, not to mention possibly lead another family on the brink of becoming homeless.

Unfortunately, predicting mortgage requires a crystal ball, a third eye and a magic wand, all of which no human being has yet to possess. Still, you can predict with a certain degree of accuracy where mortgage rates are headed. You just need to learn how to study trends, correlate two things and be observant of the economy.

Factors to Consider

It must be emphasized that mortgage companies have their own ways with which to set individual rates. However, they tend to stick to similar sets of factors when considering their rates, which you can also use to predict where said rates are headed.

First, you have to look at the rates on the Treasury notes good for 10 years. More often than not, mortgage rates follow the US Treasury rates precisely because any lower than the government’s rates and the lenders will operate at a loss. This is common sense, too, considering that the government is often well-versed in economics than the guy with an unpaid mortgage in his hands.

Second, you need to observe where the inflation rates are going. Keep in mind that there is a direct and almost proportional relationship between mortgage and interest rates. Again, it will all boil down to business since investors want a better rate of return no matter the state of the economy. Thus, when the inflation rate goes up, expect the mortgage rates to go in the same direction.

Third, you should also look at the trends. History does repeat itself in many instances but you must beware when drawing conclusions as many of today’s dynamics may have not been present in the past.

Keep in mind that mortgage predictions are just that – guesses. Thus, you should not be overly concerned if and when your guess falls off by a few percentage points since you neither have the crystal ball nor the third eye to accurately predict such things.

Tips to Know

You also need to observe what the other big name lenders are heading off into where their rates are concerned. Usually, the players in the industry will be heading in similar directions although their rates will differ by a few points. Thus, if a mortgage company announces that it will be cutting down rates, you can be sure that the rest of the pack will be following suit sooner than later.

And of course, look at history. Many of the factors that have influenced the movement of the mortgage rates are coming back in the new economy to influence said rates again. You may say that it is a cycle but that will not be accurate in all instances either. Just learn from the past and it can show you where the future could be.

In conclusion, you should not have a big problem predicting mortgage rates because these do not experience significant changes for any given period of time.

When compounding money, your personal rate of return can be a highly subjective thing. Spreading financial risk over many different investment vehicles is generally the key. There is a place for even high risk, high return investments.

Your personal rate of return refers to an investors ability to maximize the annual compounding rate of their portfolio. The way this is done by spreading risk and assessing opportunities based on that risk. Typically, high risk propositions are risky, but the way to play these propositions is to play off the odds.

The bulk of the portfolio, in any prudent investors estimation, should be made up primarily of illiquid quality real estate. The most basic example of an investment is the humble bank deposit, usually a fixed term deposit because the interest is slightly higher. This is also the safest investment of all because banks are guaranteed by the government. This humble investment model is used as a bench mark for many investors.

By looking at the level of risk a bank offers and the resulting return, you can get a clear perspective and vision, when comparing other investments. When you compare real estate to a bank deposit, real estate shines favorably. First it’s a tangible asset. Bricks and mortar can be insured. Second, providing you do not over capitalize, your return is made up of two segments. The rental and the capital gains. Historical rental returns on a mean average comparison is roughly 7% of the purchase value. The capital gains are also 7% This totals 14% Almost 300% more than the banks 5% Quite an increase. The risk rising slightly but really not disproportionately to the returns. The main thing is not to buy over priced real estate.

Maybe 10 percent of the portfolio can be used to buy shares or other exotic investment vehicles like options. Finally, 5% of the value of the portfolio can be used as “mad money” This is quite fun and you play this money aggressively. For example, you may have 5% of $300,000 to play with so you have $15000

This can be split into 7 different investments. Anything from Emu farming, to Alpacas, to Oil drilling start ups. The returns on these high risk ventures is expectedly high. If they pay off, they pay double or triple your investment. I have seen prospectus with promise of 10 times return on capital. Of course, you don’t expect to get your money back on all investments. But some can and do deliver. Some get through. Out of the 7 you may have broken even on 3, taken a 50% loss on 1 lost one completely but made a 1000% return on three. By the end of the year, you have added 25% equity on your entire portfolio, by dabbling in these high risk start ups. In the end, your personal rate of return is reflected by how prudently but aggressively you have compounded your folio.

The biggest financial decision you are likely to make is buying a home, closely followed by less expensive must-haves like a vehicle. But the one deal you should aim to get right is the decision on life insurance. This is the difference between leaving your dependents with an adequate amount of cash to see them through the times of economic hardship after your income is lost, and leaving them with nothing. In this, the decision on term as against permanent insurance is the key. Put the wrong key in the lock and you open a door into real financial hardship. So what’s wrong with term insurance? Think of this as like a bet. If you die within the term, your dependents are the winners. If you prove healthy and live too long, you lose the premiums you paid and your dependents get nothing. Now, when it comes to permanent insurance, this builds up a cash value. The longer you have the policy in place, the more valuable it comes as the premiums you pay attract investment returns. During your own life, you can take some of this money back or borrow using the fund as collateral. When the sad day finally comes, the benefits are paid out to your dependents less whatever drawings or borrowings you have made.

From these short sentences, you will immediately suspect the other difference between the products. Term life insurance is the cheap option. It gives you security in the amount of the benefits for the number of years you select. If you buy one term policy after another, the premiums are higher each time because your life expectancy is less on each renewal. Permanent insurance premiums are higher because a percentage of what you pay is invested on your behalf to generate the cash value. So your fund receives the benefit of the interest, dividends and other returns the investments generate. This makes the total of the cash value the key factor. Do you want a higher rate of return on the premiums? This can be for your own benefit should there be an emergency during your life. Or it can build up over the years for your dependents. If the answer is yes, you must be prepared to pay more to start off the policy – the first year’s premiums often disappear into a black hole representing set-up costs and the selling agent’s commission. But the amount you pay stays the same throughout the lifetime of the policy. So, with inflation, what starts out a struggle slowly grows easier to pay.

The real problem is the uncertainty of the future. Who knows how inflation may affect different aspects of life. What may be cheap now, may be expensive tomorrow and vice versa. So here are a few simple rules. If all you want is cover over the next few years (no more than ten), get life insurance quotes for a term policy. Ten years is not a long enough period of time to build up a worthwhile cash value. Estimate what benefits might be needed, e.g. your daughter will need $50,000 to cover her college tuition fees, and the total will set the amount of the insurance. If you are looking at a period of at least twenty years, you should think seriously about permanent insurance. Again, get life insurance quotes but you should also take advice on the different types of policy available and create or review your estate plan. Between ten and twenty years is a gray area and whichever way you decide is not going to be wrong.