To buy or to rent. It's an age-old dilemma for young professionals, and new doctors are not immune.
Although renting may seem more affordable now, money spent on rent is money you'll never see again. On the other hand, homeownership can actually help secure your financial future. It allows you to accumulate wealth through home equity and appreciation in value.
Still, the journey to homeownership is usually long and most of the time, costly. And for most, the best home financing solution is taking out a mortgage loan. That's why it's important that you understand how the mortgage market works.
In this article, we'll explore the key differences between the two main mortgage markets:
- Primary mortgage market.
- Secondary mortgage market.
Let's dive in.
What is the primary mortgage market?
The primary mortgage market is where borrowers go to obtain home loans directly from primary lenders.
These lenders include:
- Mortgage bankers.
- Mortgage brokers.
- Commercial banks.
- Credit unions.
- Savings and loans associations.
Primary lenders usually lend money to the public (you) and then sell a large number of the notes to investors in the secondary market. The primary mortgage market is where mortgage loans originate.
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Who is the primary mortgage market for?
The primary mortgage market is ideal for the average homeowner.
Where you are an individual or have a family of your own, the various types of primary lenders mentioned above are typically going to be open to working with you.
This is the first place the average borrower should go to obtain a mortgage loan to finance the purchase of a house.
How does the primary mortgage market work?
Primary lenders generally offer adjustable rate mortgage loans (ARM). This means that your rate is fixed for a set period, normally five years, and then adjusts on a yearly basis based on a pre-determined index. With ARM loans, payments are subject to change change, for better and worse. It all depends on the interest rate.
That being said, you need to be aware of maximum payment you may face during your loan and plan accordingly. There is often a cap for how high the interest rate can go during the term of your mortgage loan. You can always make use of this number to calculate the maximum amount you will be required to pay on a monthly basis.
In most cases, primary lenders require a down payment of at least ten percent. At times, they may ask for a down payment of up to twenty percent. Depending on your circumstances, you can always try to find a primary lender that is willing to do 10 percent or less.
Advantages of the primary mortgage market
As you can tell by now, the primary mortgage market is the most viable option for consumers. Here are its main advantages.
- Flexibility. Even if your financial situation doesn't fit the norm, most primary lenders are flexible enough to consider other solutions.
- Convenience. Primary lenders are locally-based, which makes it easy for you to deal with them directly. This also means they are in touch with the local market and can make decisions quickly based on its conditions.
- Low cost. Primary lenders usually do all the underwriting and loan documentation in-house. This minimizes the costs that are associated with closing a loan.
- Smaller down payments. Primary lenders don’t usually require a huge down payment.
Check out our weekly primary mortgage market commentary, which covers the current average mortgage rates every Thursday.
What is the secondary mortgage market?
The secondary mortgage market is the mortgage market in which primary lenders sell mortgages to investors such as:
- Insurance companies.
- Mortgage banking companies.
- Pension funds.
- The federal government.
These investors become the secondary lenders.
Who is the secondary mortgage market for?
The secondary mortgage market is not for the average home buyer.
Secondary lenders specialize in lending for large projects, such as the construction of large shopping centers and office buildings.
If you have a large real estate project, you can explore the secondary mortgage market. Otherwise, the primary mortgage market is your best bet.
How does the secondary mortgage market work?
Remember the the various types of investors listed above?
The secondary mortgage market is where these investors buy mortgages that have been originated by some of the larger national and regional banks, as well as through mortgage brokers.
In most cases, secondary lenders don’t usually see the borrowers or the property prior to the loan being originated. As such, there are usually strict guidelines that must be adhered to.
Advantages of the secondary mortgage market
If your situation calls for the secondary mortgage market, here are the main advantages you can look forward to.
- Fixed rates. Secondary lenders usually offer long-term fixed rates up to thirty years. This means that the principal and interest remain constant over time even when there are changes with taxes and insurance.
- Little or no down payment. Unlike the primary mortgage market, it is possible to obtain a mortgage from the secondary mortgage market with little or no down payment.
However, it's worth noting that the secondary mortgage market typically higher closing costs. These often include application fees, underwriting fees, inspection fees, doc preparation fees, surveys and more.
When it comes to mortgage lending, the primary mortgage market and the secondary mortgage market might as well be night and day.
If you are an average home buyer, focus on the primary mortgage market. But if you need a considerable loan to finance a large construction or real estate project, then exploring the secondary mortgage market might be more ideal.
That said, understanding how the mortgage market works as a whole is key to making smart decisions when it comes time to finance a home.