For first-time home buyers in particular, home financing documentation can be confusing.
The document that shows how much you owe your lender is called a “Note,” and you make a note payment monthly.
But when you purchase a home, the document that shows who owns the property is called either the “Mortgage” or the “Deed of Trust,” depending on the state you live in. Both are called “security instruments,” and they do basically the same thing but go about it in different ways.
If you live in a mortgage state and you default on the note, you will work directly with the lender, who will go through the court system to reclaim the property.
This can be a drawn-out process and includes court filings and specific time periods that have to be given to you, allowing you every possible opportunity to reinstate (get caught up on) the note.
Depending on the caseloads of both the court and lender, this could take from three to six months to well over a year to complete.
If you live in a Deed of Trust state, there is a third party, called a “Trustee,” who will intervene on behalf of the lender in the case of default.
Unlike the lengthy judicial process described above, this will happen much more quickly, as the trustee has the right (as provided for in the Deed of Trust) to take ownership and sell the property in order to recoup the lender’s money.
Your mortgage advisor can elaborate on these security instruments.
Financial investors essentially have three choices when they invest their money: stocks (equities), bond funds, or a mix of the two. Bonds tend to offer lower returns, but are less risky. Stocks are riskier, but have the potential to offer higher returns.
Many investors have money in both and are constantly balancing their portfolios based on the current state of the financial markets and what they expect to happen in the future.
Two of the bond-type options available to investors include:
- US Treasury bonds (also referred to as Treasury notes), which carry terms that can vary from one year or less up to 30 years. Regardless of their term, they are solid investments.
- Mortgage backed securities (MBSs), in basic terms, are large bundles of mortgages, often numbering in the thousands that are bought and sold in the financial markets. Chances are that the mortgage you have now, or will have in the future, will find its way into one of these bundles. MBS products compete with Treasuries for investors’ dollars.
So, what does all of this have to do with fixed mortgage rates?
As the US government adjusts the Treasury bond rates to manage economic policy, mortgage backed securities look more or less attractive to investors: when Treasury rates increase, MBS fund managers will instruct the lenders from whom they buy mortgages to start increasing their mortgage rates.
Investors, who know that Treasury products are highly secure, are less likely to want to take more risk for the same return were they to go with the MBSs.
However, if the rate of return on an MBS is higher than that of a Treasury product, this will catch the attention of investors, even though there is more risk. MBSs will become more attractive, no matter which way Treasury rates are moving.
Need more information? Contact your mortgage professional for details.