Mortgage "Tricks of the Trade"
For most people, the mortgage industry is complex and often confusing. A mortgage is often the biggest financial move most people will make, so it’s important to understand how mortgages work. Let’s take a look behind the curtain at some of the major factors that influence the mortgage industry, and more importantly, your own mortgage.
· Why do mortgage interest rates rise and fall all the time?
The answer is US Treasury notes, more specifically, the yields on notes with terms of one, five and ten years. Mortgage interest rates are tied to these yields. When yields go up, so do mortgage rates. When yields go down, mortgage rates follow.
So what makes US Treasury yields rise and fall? In a word: investors. If they’re buying a lot of US Treasury notes, the yields fall and so do mortgage interest rates. But if investors aren’t buying, the yields rise to attract more buyers. And mortgage rates increase as well.
· What determines how much you can borrow?
The amount of your mortgage is based on how much income you earn and how much debt you already have. Mortgage lenders calculate this with what’s called the “debt-to-income” ratio, or DTI, which specifies the maximum amount of debt you can have in relation to your income. A rule-of-thumb is that your mortgage payment shouldn’t be more than 28% of your gross monthly income.
· Where do mortgage funds come from?
Decades ago, a bank would lend you money obtained from the deposits of people and businesses in your community. Today, mortgage financing is a global enterprise, and the money you borrow could come from a number of sources. For example, your mortgage lender may be tapping into a credit line or obtaining funds from a mortgage investor.
Making funds available from a much wider pool of sources has greatly expanded a mortgage lender’s ability to make more loans and help more people buy homes.
· How are credit scores calculated?
Your credit score is calculated based on your credit history obtained from all of your creditors, past and present. This includes credit cards, auto loans, mortgages, basically anytime you’ve borrowed money. Three companies collect this information on an ongoing basis: TransUnion®, Equifax® and Experian®. When you’re ready to borrow money for a mortgage, your lender will tap into these three credit bureaus to get an up-to-date picture of your “creditworthiness.” That gives lenders a sense of your ability to pay the loan back as agreed.