Primary Mortgage Market

What Is the Primary Mortgage Market?

The primary mortgage market is the market where borrowers can obtain a mortgage loan from a primary lender. Banks, mortgage brokers, mortgage bankers, and credit unions are primary lenders and are part of the primary mortgage market.

How the Primary Mortgage Market Works

Homeowners can deal directly with primary lenders while shopping for a mortgage loan by contacting their neighborhood bank. For most borrowers, they won't notice that they're dealing in the primary mortgage market since they'll interact with their mortgage representative at their neighborhood bank during the whole cycle. The mortgage professional will teach the borrower about the different types of mortgages available and quote the interest rate depending on which type was chosen. The nearby branch will normally be the location for the loan closing — where the desk work is agreed upon.

Numerous borrowers likewise start the home-buying process by contacting a mortgage banker or mortgage originator. Originators and mortgage bankers are not banks essentially, however instead, assist with facilitating the transaction and allude the mortgage request to a bank to close the loan. The brokers get a fee for their service since they allude business to primary lenders. The borrowers, then again, stand to get a better rate by having the broker shop around for the best deal depending on borrower's credit and the ideal terms.

Nonetheless, it's important to note that the Consumer Financial Protection Bureau has executed regulations regarding compensation for mortgage brokers. Before the financial crisis, brokers could receive compensation from the borrower as well as the lender. Consumers were unaware that the broker was getting paid by the lender when they paid their fee. Likewise, brokers had incentives to direct consumers to additional costly products or mortgages and at times, higher interest rates. Since the Great Recession of 2008 and 2009 and the resulting regulations that followed, the number of mortgage brokers has declined.

Benefits of the Primary Mortgage Market

There are a few benefits available to borrowers who execute in the primary mortgage market, which can include:

Low Closing Costs

Primary lenders are normally privately claimed banks, and that means that they do the credit analysis and underwriting process. Underwriters survey a borrower's financial information and credit history to choose whether to expand credit or deny the loan. Likewise, nearby banks prepare the entirety of the desk work and documentation in-house instead of going through a centralized unit out of state similar to the cycle for a few large banks. The outcome can be lower fees with a nearby bank since they have less overhead versus a larger bank. Likewise, on the off chance that a mortgage broker engaged in finding the bank, a fee will be assessed too. In short, opting for a privately run bank for a primary mortgage can assist with reducing closing costs.

Small Down Payments

Commonly, the down payment for a mortgage is 20% of the purchase price of the home. Nonetheless, a borrower can put down less money, and numerous primary lenders offer a 10 percent downpayment.

For low-to-moderate income borrowers, a FHA loan offers a down payment as low as 3.5% of the value of the home. FHA is the Federal Housing Administration, which offers insurance to lenders so they can issue loans to low-income borrowers.

In any case, a down payment of under 20% triggers the requirement for the borrower to purchase private mortgage insurance or PMI. PMI safeguards banks and lenders in case the borrower defaults on the mortgage. PMI is a month to month fee charged to the borrower until 20% of the mortgage loan has been paid off.

Flexibility

Because the originators of the loan are normally privately possessed banks, almost certainly, the borrowers will actually want to speak with individuals who get the final say, which is probably not going to occur at a national bank. The direct contact can give flexibility in the event that the borrowers have a unique financial situation.

The flexibility can include offering a fixed-rate 15-year versus a 30-year mortgage in the event that the borrower is looking to pay off the loan sooner. A portion of the advantages to a 15-year mortgage include less total interest charges since it's paid off before. Likewise, borrowers can typically arrange a lower interest rate since there's less risk of the borrower defaulting, or not paying off the loan due to financial hardship. Of course, a big advantage to a 30-year mortgage is that it offers lower payments since they're spread out over a more extended period versus different terms.

Adjustable rate mortgages are a flexible option that are generally offered for consideration. ARM loans as a rule accompany a fixed interest rate for a set period of time and afterward adjusted every year on an index that was pre-determined by the lender and the borrower. Commonly, ARMs accompany a cap on how high the interest rate could go during the lifetime of a loan, which makes it simpler to compute and budget for your maximum regularly scheduled payment.

Primary Mortgage Market versus Secondary Mortgage Market

The primary market is comprised of primary lenders. Primary lenders regularly keep the loans they originate as part of their portfolio and service them for the life of the loan. Notwithstanding, the bank that made the mortgage loan can sell the loan in the secondary mortgage market, which is a market where investors can buy and sell beforehand issued mortgage loans. A mortgage can be sold to another lender or service company, which processes the payments for the loan. The new lender or service provider earns money from fees and interest on the mortgage.

Many mortgages are purchased by Fannie Mae or the Federal National Mortgage Association (Fannie Mae, or FNMA). Fannie Mae pivots and bundles the loans and sells them as investments called mortgage-backed securities (MBS), which are like mutual funds yet contain mortgages instead of stocks. Investors earn the interest rate from the mortgages for holding the MBS.

Assuming your mortgage is sold, please know that it's a common practice in the financial industry. Banks have lending limits, meaning they have caps with regards to the amount of their deposit base they can loan. The sale of a mortgage loan to Fannie Mae or a service provider eliminates the loan from the bank's books allowing it to loan out more money. On the off chance that banks couldn't sell off their mortgages, they'd arrive at their lending caps and wouldn't have the option to offer additional mortgages, which would slow the economy. In any case, except if you're an investor looking to purchase a MBS, you won't deal with the secondary market. Instead, you'll deal with a bank or broker in the primary mortgage market.

Highlights

• The primary mortgage market is the market where borrowers can obtain a mortgage loan from a primary lender.
• Banks, mortgage brokers, mortgage bankers, and credit unions are primary lenders and are part of the primary mortgage market.
• Homeowners can deal directly with primary lenders while shopping for a mortgage loan by contacting their neighborhood bank.