Purchase Mortgage Market

What Is the Purchase Mortgage Market?

The purchase mortgage market is the portion of the primary mortgage market devoted to loans for new home purchases. The remainder of the primary market is made up of refinancing transactions and home equity loans.

Key Takeaways

  • The purchase mortgage market is a part of the primary mortgage market focused on loans for new residences.
  • The primary market is made up of both purchase mortgages and refinancing transactions.
  • In a purchase-money mortgage, the seller of a property offers a mortgage to the buyer, often as an incentive to buy the house.
  • Home mortgages originate in the primary mortgage market.
  • The secondary mortgage market is where existing loans are exchanged between financial counterparties.

How Purchase Mortgage Market Works

The purchase mortgage market refers to the sector of the primary mortgage market made up of loans used to finance the purchase of a home. Participants in the purchase market include mortgage originators. such as banks or other financial institutions, who initiate and make new loans to homebuyers.

On the other side, borrowers seek mortgages in order to finance the purchase of a property. In between the lender and the borrower, mortgage brokers, bankers, or agents help facilitate the process and shop around for the best interest rates and terms.

The borrower may be intending to purchase a property to occupy or to treat it as an investment and collect rents. Lenders will consider the financial situation of the prospective borrower and decide whether or not to issue a mortgage (and on what terms) based on a process of underwriting.

Borrowers will also have to come up with an initial down payment (often in the range of 20% of the purchase price). A down payment smaller than 20% would require borrowers to obtain private mortgage insurance (PMI), which protects the lender from default by the homeowner. Note that a buyer may be able to bypass PMI with a purchase money second mortgage or piggyback loan.

The second component of the primary mortgage market is the refinance mortgage market. The primary market is where mortgages originate.

Purchase Mortgage vs. Purchase-Money Mortgage

It is worth distinguishing between a purchase mortgage, bought and sold on the purchase mortgage market, and a purchase-money mortgage. In the latter case, the seller of a property offers a mortgage directly to the buyer to facilitate a transaction, without going to a bank or other financial lender. Also known as a seller- or owner financing, purchase-money loans are usually taken out when a borrower cannot qualify through regular channels, or when the seller is sending to family or close friends.

Purchase mortgages, on the other hand, originate from a financial institution. Moreover, these lenders often originate loans but quickly sell them to other investors. Purchase mortgages are often bundled together with similar loans and sold on the secondary market. Buyers on this secondary market are often government-sponsored enterprises such as Fannie Mae and Freddie Mac. They then securitize the bundled loans and re-sell them as mortgage-backed securities (MBS), and in some cases, these could become commingled with refinanced loans.

A purchase mortgage is bought and sold on the purchase mortgage market, and a purchase-money mortgage happens when the seller of a property offers a mortgage directly to the buyer as an incentive to facilitate the transaction.

Special Considerations

Over time, the relative sizes of the purchase mortgage market and refinance mortgage market will fluctuate due primarily to movements in prevailing interest rates. When interest rates rise, borrowers are less likely to refinance, and the purchase mortgage market will likely represent a larger portion of the primary market. When rates fall, refinancing can become more attractive to the borrower. The purchase mortgage market will shrink relative to refinancing.

Secondary factors in the fluctuation of the purchase mortgage market include available inventory, which can be driven by new home construction rates, and home prices. Rising home prices can lead to fewer new mortgages, as houses elude the purchasing power of many potential buyers. Employment levels and the cost of oil can impact overall mortgage originations as well.

In general, lenders will offer lower interest rates for purchases due to the fallout risk associated with refinances. One significant advantage of a refinance is that it allows the borrower to remain in the property and avoid moving.

A homeowner faced with the choice of a new purchase mortgage or refinancing of their existing mortgage should consider the pros and cons of both.

What Is a Mortgage Marketplace?

A mortgage marketplace is where lenders and borrowers come together and transact. In the primary market, new loans are issued for purchase or refinancing. In the secondary market, existing mortgages are traded among financial firms.

How Can I Get a Mortgage?

Borrowers seeking a mortgage have several options. You can go directly to a bank or specialized mortgage lender. You can also engage with an agent or mortgage broker to help find you the best rates from among several potential lenders. After deciding on a lender, you will submit an application. The lender will review your financial position, the value of the home, and overall riskiness through a process called underwriting. Afterward, the lender will either accept or reject your loan application. Once accepted, a mortgage will only be finalized at closing, where certain additional closing costs may be required.

What Is a Purchase Money Second Home Loan?

A purchase money second mortgage, also called a piggyback loan, involves a traditional first mortgage along with a second new loan to cover part of the down payment. For instance, the first loan may be for 80% of the value of the property, and the second for 10%. This means the borrower only needs to come up with a 10% total down payment. The second home loan may be a home equity loan (second mortgage) or a home equity line of credit (HELOC).

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