When purchasing a home, many people either do not have the cash on hand or wish to spread the total payment over a long period of time, such as 15 to 30 years. Mortgage loans are available to allow people to finance the majority of the housing purchase. However, once the contract is signed, most banks actually sell these loans to another banking institution which operates in the secondary mortgage market.
When a person initiates the lending procedure by finding a lending institution and agreeing to the terms of the contract, they are dealing in the primary market. It is here that the principal amount, interest rates, and length of the loan are decided. The details are subject to the stipulations of the bank and the agreement of the borrower.
For a bank, this is a repetitive procedure that is completed for numerous amounts of people or businesses. A loan does not have to be for a housing purchase, but can be made for several different reasons. Doing such slowly eliminates the reserve funds that they have on hand. Over time they can become depleted.
One of the primary sources of income for banking institutions is the interest that is paid by borrowers. Therefore, the bank will want to have more capital to give to other people in the form of a loan. In order to do this, they will often sell the mortgages to an organization operating in the secondary market.
Once purchased, many of these companies bundle the purchases together and sell them as securities called collateralized debt obligations (CDO)or collateralized mortgage obligations (CMO), and other names. These are sold on the stock market for investors to purchase shares in. By doing this, the business hopes not only to cover the risk of default, but also profit from investors.
The offerings in the secondary market, which many people do not even realize exists, do not place the mortgage loans of the initial borrowers at risk for loss of their home. They do however, put the stock market at risk when the borrower defaults on their payments. It is a complicated process to understand and operate.
When a person initiates the lending procedure by finding a lending institution and agreeing to the terms of the contract, they are dealing in the primary market. It is here that the principal amount, interest rates, and length of the loan are decided. The details are subject to the stipulations of the bank and the agreement of the borrower.
For a bank, this is a repetitive procedure that is completed for numerous amounts of people or businesses. A loan does not have to be for a housing purchase, but can be made for several different reasons. Doing such slowly eliminates the reserve funds that they have on hand. Over time they can become depleted.
One of the primary sources of income for banking institutions is the interest that is paid by borrowers. Therefore, the bank will want to have more capital to give to other people in the form of a loan. In order to do this, they will often sell the mortgages to an organization operating in the secondary market.
Once purchased, many of these companies bundle the purchases together and sell them as securities called collateralized debt obligations (CDO)or collateralized mortgage obligations (CMO), and other names. These are sold on the stock market for investors to purchase shares in. By doing this, the business hopes not only to cover the risk of default, but also profit from investors.
The offerings in the secondary market, which many people do not even realize exists, do not place the mortgage loans of the initial borrowers at risk for loss of their home. They do however, put the stock market at risk when the borrower defaults on their payments. It is a complicated process to understand and operate.
About the Author:
You can get more info on 40 year mortgage and many other mortgage related articles by visiting the http://40-yearmortgage.com website.
0 Comments Received
Leave A Reply