A mortgage market works as buying and selling of loans, that’s as simple as it can be.
So you put your finger on your dream house; it’s big, safe and beautiful. Instantly you’ve imagined raising a family there, with kids playing in the backyard, hosting dinners in the house, having tea on the patio when the weather is just perfect.
But for this dream to become a reality, you need a hefty loan. That is when you enter the mortgage market. The process seems simple right, you find a mortgage lender, you fill in the application, it gets accepted and you get the money. Now you have to spend years repaying the loan, sounds doable, right? Well, it’s not as simple.
Here are some of the details about the mortgage market that you need to be mindful of to be able to get the right loan and the right house.
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Primary Mortgage Market
A primary mortgage market is typically where loans are created. You enter the market looking for a mortgage lender and you find one, since it is a new transaction, the lender will be ‘originating’ the loan.
Mortgage banks, mortgage brokers, lenders, and credit unions are all part of the primary mortgage market. A mortgage broker is the person who brings together borrowers who are willing to buy loans from lenders, whereas a mortgage banker is an institution or an organization that lends the loan and soon after sells it too. The downpayment for primary lenders is usually 10% but could also go as high as 20%. If you’re lucky, you’d be able to find one with a cheaper rate.
The economy plays a role in the primary market, if the economy is booming, it is easier to get mortgage loans. But if it is already facing low credit or other financial constraints, it could be relatively harder to get loans. A decline in the economy also has an effect on the secondary mortgage market.
Secondary Mortgage Market Definition
Where the primary mortgage market has a direct relationship with the borrower, the secondary mortgage market somehow works in the background- as a third party.
Players from the primary market become the middle-man in the secondary mortgage market. So if you bought a loan from a bank, who in turn borrowed it from an organization, and now you have to pay back the loan to the organization, NOT the bank anymore. The bank, this way, has earned money through loan origination fees, not from interest on the loan.
Banks offer loans to borrowers, and soon sell them in the secondary market to bigger companies to retain their funds so that they can lend out to other customers as well. Participants of the secondary mortgage market are mortgage originators, mortgage aggregators and investors.
The whole definition process may have sounded confusing to you, I understand. Don’t worry, let me explain it to you using a real life example and see how the two mortgage markets come into play simultaneously.
Eric has chosen a home he loves and wants to finance it. Naturally he searches for a mortgage lender and intends to shop around. Unknowingly, he is aiming to enter the primary mortgage market. Amongst options, he decides to borrow a loan from a big commercial bank. He wants the process to go through and the bank originates the loan.
In no time, he gets the loan to fund his house. A few months later, he gets an email which says that the commercial bank has ‘sold’ the loan to an organization. Eric now has to pay the loan back to the organization, NOT the commercial bank anymore. Wait, they sold his loan?
What happened was that the bank used warehouse lending to borrow the loan, sell it to Eric and then sell it to the organization. Warehouse lenders basically lend money to mortgage originators.
The bank sold Eric’s loan in the secondary mortgage market, where the major participant, the organization- also known as the mortgage aggregator comes into play.
This is basically an example of how primary and secondary mortgage markets work hand-in-hand.
Primary vs Secondary Mortgage Market
Now that we’re clear on how the mortgage market works in the light of the primary and secondary market in real estate, it is important to note down the benefits of both.
Benefits of Primary Mortgage Market
- Primary lenders are based locally who know the current market trends and will help you make relevant decisions.
- Since it is a direct relationship between the lender and the borrower, there is room for flexibility too. If the current financial plan doesn’t really resonate with the borrower, some tweaks could be made to solve problems.
- There is a low closing cost to loans originated in the primary market because lenders do everything in-house, themselves. So there are no documentation and administration fees, this means the deal is closed on an affordable rate.
Benefits of Secondary Mortgage Market
- Secondary market lenders offer a fixed rate of principal and interest portion and are able to offer it long-term, for upto 30 years. Rise in investment costs and insurance costs could affect overall coverage, but the interest portion remains constant.
- The secondary market offers a variety of down payment options through a number of government funded programs. If you fit in the eligibility criteria and qualify for the loans, you can have little or no down payment options on your mortgage.
Borrowing loans from mortgage lenders and simply getting a loan from one of the participants is the nature of the primary mortgage market. And this one is a simple procedure too. You simply go to the loan originator, have the application approved and voila, you’ve been approved for a loan.
The process gets a little complicated when the secondary mortgage market comes into play, the loan has now been sold to one of the participants of the secondary mortgage market. You have to pay the loan to the aggregator now, not the original mortgage lender you borrowed it from.