If you’re ready to purchase or refinance a home, you may have a few questions about the mortgage market and what it all means. Let’s look at some of the basics of the it all:
What Is the Mortgage Market?
First things first, a mortgage is any loan that pledges a piece of real estate as collateral. In this case, you’re probably most familiar with the mortgage as a home loan.
The mortgage market is the structure that supports home lending and it’s split into two markets: the primary and secondary. The primary mortgage market is where home loans originate before they’re sold to investors in the secondary mortgage market. For borrowers who are buying a house, the primary mortgage market is designed to help them achieve your goal of homeownership.
What Is the Secondary Mortgage Market?
Mortgage loans are designed to be long-term investments, which is a weakness of the primary market. If banks and mortgage loan originators held onto loans for the life of the term, they would have to wait up to 30 years to be fully paid back. This would limit the amount of funding available for people to get homes.
This is where the secondary market comes in.
The secondary mortgage market allows investors to buy mortgage-backed securities (MBS), entitling them to principal and interest from mortgage payments. These MBS are often made available by major mortgage investors like Fannie Mae, Freddie Mac, the FHA, and VA. These agencies provide investor protection, by guaranteeing future payments in the event of default.
How Has COVID-19 Affected the Mortgage Market?
The mortgage market is always responding to movements in bigger financial markets. COVID-19 has been the most recent obstacle the market has faced recently. During the pandemic, mortgage rates fell quite a bit as the Federal Reserve took a series of actions to enable easier borrowing for consumers.
To make it easier on borrowers to maintain their mortgage payments, the CARES Act was created. The CARES Act allows Americans impacted by COVID-19 to ask for up to a year worth of mortgage forbearance in 6-month increments if they had a government-backed loan.
The CARES Act may not apply to every borrower, in that case, forbearance would be brought into play. Forbearance is a pause in your mortgage payments. However, paused payments must eventually be caught up on. To that end, depending on your financial situation, your experienced mortgage loan originator will work with you to see if you qualify for any of the following:
- Repayment plan: You may qualify to have part of the past-due balance added to your regular monthly mortgage payment until you’ve caught up.
- Deferral or partial claim: If you qualify, up to a year’s worth of mortgage payments can be set aside to be paid off at the end of your mortgage loan term, when you refinance or sell the property. You won’t owe any additional interest beyond the amount owed on the original payment.
- Modification: In some instances, you may qualify to have the terms of your loan modified by your mortgage lender to build in the overdue balance while maintaining payment affordability. Examples of this may include changes to your term or interest rate.
While on forbearance, clients can make full or partial payments if they can do so. This is recommended because it’ll lessen the amount you must pay back at the end of forbearance.
Understanding Mortgage Rates
There are two big facets that determine mortgage interest rates: market conditions and your personal financial profile.
Market conditions are the factors that influence the housing market in a particular area, such as cost of living, demographics, supply and demand, the number of competitors in a particular market, the intensity of competitiveness, the total market available, and the rate at which the market is growing.
Your personal financial profile will include, but is not limited to, the following: your credit scores, the home’s location, the home price and loan amount, how much you have available for a down payment, and the loan term and type.
While there are many more pieces that contribute to the mortgage market, this is quick overview that can help you better understand the process behind your mortgage loan. To learn more, get in contact with one of our local lenders.