This section is dedicated to informing you on how mortgages work and the details and specifics to give you the knowledge needed when buying or refinancing your home.

Why are mortgage rates tied so closely to economic and financial market events?

When a person borrows money from a lender, the person must sign a promissory note promising to repay the home loan and a mortgage note (or deed of trust) to serve as collateral for the loan. The bearer of these notes has a legal claim to the property until the mortgage loan is either paid in full or refinanced. When a lender has loaned out all of its available funds, the lender will often raise money by selling groups of these notes (mortgage loans) to investors. The selling of mortgage loans to investors is referred to as the 'secondary mortgage market.' In order to attract investors, this secondary mortgage market must be competitive with similar investment markets. Since a mortgage loan is a long term debt, the Treasury bond market (debt issued by the federal government) is used as a benchmark for determining appropriate value.

Why is bad economic news good news for mortgage rates?

Inflation is the primary factor that affects the Treasury bond markets and interest rate levels. Treasury bond investors do not like inflation because it eats away at the value of their fixed return investments. When the economy slows down, the threat of inflation is subdued and investors become more comfortable investing in long term debt. This is the reason the Treasury bond market rallies (bond prices move higher) on weak economic news. When the price of a Treasury bond moves higher an investor is forced to pay more for this investment, so its yield (return on investment) to the investor declines. When the yield on Treasury bonds decline the yield on all similar investments (including mortgage loans sold in the secondary market) decline as well. If a lender can sell mortgage loans at a lower interest rate to investors, the lender is likely to pass on these lower rates to you, the borrower.

Some lenders can help credit-blemished borrowers obtain home financing.

Your credit report may be full of dings, compounded with a history of foreclosure and bankruptcy, but you may still get a loan for home purchase, refinance, or even cash out of your current home. It doesn't matter whether you have charge-offs, collections, or tax liens on your credit report, as long as you can meet the specific guidelines for loan approval by a multitude of lenders specialized in the credit-damaged borrower.

The lending industry uses categories to asses the credit risk of any particular borrower. If the property checks out and you have sufficient income, impeccable credit and the required down payment you are considered an 'A' borrower. An 'A' borrower can walk into almost any lender and get a mortgage loan. A borrower can fall short in one of these areas and still be considered an 'A' borrower, as long as the other areas can compensate for the weakness. For example, a borrower that exceeds the required monthly debt-to-income ratios (28% housing debt and 36% combined debt) could offer a large down payment. Many lenders will also excuse modest credit 'blemishes' if a reasonable explanation is provided (i.e. job transition, medical problems). Being 30-60 days late on one credit card payment is a typical blemish that could be accepted by a lender.