In 2021, the mortgage market in the United States is valued at almost $12 trillion, as per Statista’s report. The US mortgage sector has two separate markets: the primary and the secondary markets. Each caters to the needs of homebuyers, lenders, and investors respectively. 

Someone who wants to buy a house goes to the primary mortgage market to borrow money for the home purchase. Investors who want to put their money in existing mortgages in the hope of returns tap the secondary mortgage market. 

For sure, you want to find out more information about the primary and secondary mortgage markets. This blog post is for you. 

The Primary Mortgage Market

The primary mortgage market is where people acquire loans for their home purchase. A report by the National Association of Realtors states that almost 75% of homebuyers used a mortgage to buy a home in 2021. All these home loans can be obtained through the primary mortgage market. 

This market is made of various mortgage lenders where homebuyers can get direct home loans. Here is a list of mortgage lenders in the primary market. 

• Banks and credit unions. These two are common lenders that homebuyers resort to when they need a mortgage. 

• Mortgage brokers. A mortgage broker helps look for the best home loans for clients who want to purchase a house or refinance. This financial middleman usually has direct access to primary mortgage market lenders. One advantage of working with a mortgage broker is you can obtain a quality mortgage according to your credit history and preferred loan terms. 

• Online lenders. Homebuyers can get a mortgage through online lenders. In contrast to traditional lenders, online lenders can offer lower interest rates and fees. However, this affordability is not uniform with all online home loans. It is crucial you have to search through various online lenders in the primary mortgage market. 

The Secondary Mortgage Market

In the secondary mortgage market, investors can purchase existing home loans to generate a profit. Most banks and primary lenders typically sell mortgages as a way to recoup their capital and be able to offer home loans to borrowers. Here are some of the investors operating in the secondary mortgage market. 

• The Federal Home Loan Corporation. It is a private company that operates in the secondary mortgage market. It buys into loan notes from savings and lending institutions. 

• The Federal National Mortgage Association. The FNMA is among the biggest secondary loan providers. The US government backs and supervises the FNMA, which makes it a unique player in the secondary mortgage market. It buys loans from various lenders. 

• The Government National Mortgage Association. The GNMA is owned and operated by the government. It buys existing loans from the Federal Housing Administration, the US Veterans Administration, and other government-backed lenders. 

Mortgage Investing: Explained

Investors purchasing existing mortgages keep the market active as they are funding and providing guidelines to lenders. The money that comes from investors into the lenders ensures that the market keeps going and allows homebuyers to obtain loans. 

Normally, the borrower submits a loan application to the lender. If the lender approves the application, the borrower gets the money needed to buy or refinance a home. Then, the latter must pay back the loan amount plus interest until the mortgage is paid within the prescribed period. 

However, lenders must not depend solely on the monthly payments from their borrowers since they would not have sufficient funds to offer other prospective borrowers. That is why they sell mortgages to investors via the secondary market. Investors help these lenders to fund their business operations and issue more home loans to potential borrowers. 

Factors That Determine Mortgage Rates

There are factors that affect mortgage rates. You must consider factors that you can control and those you cannot. 

• Credit score.  If you have a good credit score, you can choose from a variety of mortgage options and get lower interest rates. 

• Loan-to-value ratio. You can lower this ratio if you put in a large down payment. Make sure not to exceed your loan-to-value ratio over 80% because it can result in a high mortgage rate. 

• Market forces. Economic factors are beyond your control as a borrower. Mortgage rates may fluctuate due to inflation, employment growth or decline, and the overall state of the economy. 

• The Federal Reserve. The Fed sets short-term interest rates according to market forces. This, in turn, affects the mortgage rates. 

Endnote

Mortgage borrowers, lenders, and investors should be familiar with how the primary and secondary markets work. The primary mortgage market offers borrowed direct access to money they need to buy a house. While the secondary mortgage market helps lenders secure funds from investors to issue more mortgages to potential borrowers. There is a mutual relationship between the two markets that keeps them going.