New doctors and young professionals are faced with the age-old dilemma of buying or renting. Initially, for many, renting seems more affordable. But it’s money that you’ll never see again. On the other hand, homeownership can provide a home and help secure your long term financial future. Owning a home lets you accumulate wealth through home equity and value appreciation. If you’re shopping for a new home or thinking of beginning the process of understanding how the mortgage market works is a good idea. In this article, we’ll take a look at the differences between Primary Mortgage Market vs. Secondary Mortgage Market.
What is the Primary Mortgage Market?
In the primary mortgage market, borrowers get home loans directly from primary lenders. Primary lenders include:
- Mortgage brokers
- Mortgage bankers
- Commercial banks
- Credit unions
- Savings and loans associations
Primary lenders generally lend money to the public and then sell a large number of notes to investors in the secondary market. All loans originate in the primary market.
How Does the Primary Mortgage Market Work?
Most primary lenders will offer adjustable-rate mortgage loans (ARM). These loans keep your interest at a fixed rate for a set period of time, usually five to seven years. After the set time expires, the rate will adjust to current market conditions.
You can also get a Fixed-rate mortgage loan for 15 to 30 years. Fixed-rate mortgage loans will keep the same interest rate for the entire lifespan of the loan. These loans generally will be at a higher interest rate than an ARM loan, however, they can take out the risk of having to adjust down the road to a new interest rate.
Most primary lenders will require a down payment of at least ten percent unless you qualify for a physician mortgage. Physicians can avoid the 10 to 20% downpayment most homebuyers need to avoid paying extra mortgage insurance.
What is the Secondary Mortgage Market?
The secondary mortgage market is where primary lenders sell mortgages to different investors like:
- Insurance companies
- Mortgage banking companies
- Pension funds
- The federal government
How Does the Secondary Mortgage Market Work?
The secondary market helps make credit equally available to all borrowers across geographical areas. When you take a home loan, the loan is underwritten, funded, and serviced by a bank. Because the bank uses its own funds to make the loan, they would eventually run out of money to loan if not for the secondary market. To keep loan capital available, banks sell the loans to the secondary market to replenish their funds so they can make more home loans.
Before the secondary market was established, only large banks had enough funds to provide for the life of a home loan. Because of the lack of competition and options, homebuyers had more difficulty finding mortgage lenders, and banks were able to charge higher interest rates. The 1968 Charter Act solved the problem by creating Fannie Mae and Freddie Mac.
