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Understanding the Secondary Mortgage Market

By Tiffany Raiford

Many homeowners have heard of the secondary mortgage market, but others haven't and might not be aware of what it is and what it means. It's a market that allows banks to sell mortgages to other lenders. This provides them with the funds to offer mortgages to new borrowers. This works because if lenders held onto mortgages for the full term of each (often 30 years) they'd run out of capital and have no money to offer their new borrowers.

Secondary Mortgage Market

Consider this; if a bank did nothing but offer money to borrowers who wanted to buy homes, they'd soon run out of money. Banks are not never-ending pools of money, even in Southern California. Especially in Southern California, where mortgages are some of the highest in the country. The secondary mortgage market exists to provide banks with the funds they need to continue to offer loans to their customers. It works because borrowers don't lose and the lender gains even more money.

The reason secondary mortgage markets exist is to keep lenders from tying up all their money and not being able to offer mortgage loans to future applicants. If not for these mortgage-backed security investors, the housing market would come to a screeching halt.

How it Effects Homeowners

One of the biggest questions surrounding the secondary mortgage market is how it effects homeowners. Homeowners are usually concerned that it might have a negative impact on their mortgage, perhaps causing their rates to rise. For the most part, homeowners have no idea their mortgage has been sold to a secondary mortgage market until they receive an introductory letter from the new debt holder.

The secondary mortgage market does effect homeowners when it comes to the interest rate you are offered in the first place. Security investors who purchase mortgages from lenders are typically the decision makers behind mortgage interest rates. However, this affects you prior to your home purchase. When and if an investor takes over your loan down the line, there is no change in your terms or payments.

While it is important to understand how and why the secondary mortgage market works and exists, it's also important to understand that it's not something that will affect you once you've purchased your home. Of course, if you choose a variable rate mortgage option, you could be affected by the changing interest rates but this is something you know prior to making your purchase and signing on the dotted line. Fear not the existence of the secondary mortgage market; the fact that it exists is likely the reason your lender could afford to provide you with the funds to purchase your home.

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