Mortgage Rates and Risk What is the general relationship between mor.pdf

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Mortgage Rates and Risk What is the general relationship between mortgage rates and long term government security rates? Explain how mortgage lenders can be affect by interest rate movements. Also explain how they can insulate against interest rate movements. Solution There is a direct correlation between mortgage rate and long term Govt security rates. When the long term Govt security rate increases , the cost of fund generally increases, so the cost of money for the motgage provider also increases. Therefore for fixed rate morgage lenders, higher rate on long term Govt security indicates higher cost of borrowing but earning at the prevuis rate. It causes loss for the morgage lender. The situation is reversed when long term Govt security rates decrease and the cost of borrowing decreases. Morgage lenders can insulate themselves against interest rate movements by offering Adjustable rate mortgages where the morgage interest rate varies with benchmark Govt lending rate and any positive or negative movement in Govt rates cause movement in mortgage rate in the same direction..

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Jimmy Vercellino, an experienced professional with mortgage lender First Choice Loan Services, works hard to provide a personalized home loan process for you. Options include FHA and VA loans, fixed / adjustable rate mortgages, Jumbo loans and more. Visit http://phxhomeloan.com First Choice Loan Services Inc. 7600 E. Doubletree Ranch Road #200 Scottsdale, AZ 85258 480-800-8387 jimmy@phxhomeloan.com

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Borrower\'s Perspective: If the income of a borrower increases with inflation and if he owes money before inflation then the inflation benefits the borrower as the same amount of interest/principle amount is owed but the income is increased and after paying off the debt the money with that person is more compared to the period before inflation. Hence it results in less interest for the lender if the borrower uses the extra money to pay his or her debt early. Lender\'s Perspective: Inflation can benefit lenders in several ways, especially when it comes to making new financing. If the wages is not increased but the borrower needs to keep up with the daily expenses, then he approaches a lender. Hence because of the inflation the prices increases by certain percentage and hence the lender can benefit from that increase in price of the item. Ex: Due to inflation the radio price increases from $ 100 to $ 120, lender lends out $ 120 by this he can earn more interest. In some cases due to the wages is stable and no increase is seen, the lender can earn more interest as the borrower may not be able to pay off his debt as his wages are not increased. Savings Perspective: Inflation affects saving of an individual, that is if the savings account has $ 100 and earns an interest of 2% then after a compounding period it becomes $ 102, but if during that period inflation hits say around 4%, he may need around $ 104 to cope up with his daily expenses. If your savings don’t grow to reflect this rise in prices over time, the effect will be as though you are actually losing money. Inflation degrades the purchasing power of an individual. Investor Perspective: Inflation is also a concern to investors, since changes in inflation and interest rates affect various asset types in different ways. The impact of inflation on the portfolio depends on the type of securities being in hold. Stocks have been performing as a good hedge against the inflation. It can be seen historically. Mainly for retirees whose risk averse they can invest in inflation indexed securities in order to protect their savings from degrading due to inflation. Solution Borrower\'s Perspective: If the income of a borrower increases with inflation and if he owes money before inflation then the inflation benefits the borrower as the same amount of interest/principle amount is owed but the income is increased and after paying off the debt the money with that person is more compared to the period before inflation. Hence it results in less interest for the lender if the borrower uses the extra money to pay his or her debt early. Lender\'s Perspective: Inflation can benefit lenders in several ways, especially when it comes to making new financing. If the wages is not increased but the borrower needs to keep up with the daily expenses, then he approaches a lender. Hence because of the inflation the prices increases by certain percentage and hence the lender can benefit from that increase in price of the ite.

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Mirrlees\' 1971 paper (An Exploration in the Theory of Optimum Income Taxation) on optimal taxation can sometimes be hard to follow. Does anybody know of (or could even provide here) a simple sketch of the derivations of the optimal nonlinear income tax schedule in his paper? Solution You can find a didactic exposition of Mirrlees (1971) including derivations of optimal tax schedule formulas for different social welfare and utility function in section 4.2 of \"The Economics of Taxation\" by Bernard Salani.

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