The primary mortgage market is the market where borrowers can obtain a mortgage loan from a primary lender. Banks, mortgage brokers, mortgage bankers, and credit unions are primary lenders and are part of the primary mortgage market.
How the primary mortgage market works
Homeowners can deal directly with major lenders when shopping for a home loan by contacting their local bank. For most borrowers, they will not realize they are dealing in the primary mortgage market as they will be interacting with their mortgage representative at their local bank throughout the process. The mortgage professional will inform the borrower about the different types of mortgages available and will quote the interest rate according to the type chosen. The local branch will usually be the location for the loan closing, where the paperwork is signed.
Many borrowers also begin the home buying process by contacting a mortgage banker or mortgage originator. Mortgage originators and bankers are not banks per se, but help facilitate the transaction and refer the mortgage application to a bank to close the loan. Brokers get a fee for their service as they refer business to major lenders. Borrowers, on the other hand, can get a better rate if the broker searches for the best deal based on the borrower’s credit and desired terms.
However, it is important to note that the Consumer Financial Protection Bureau has implemented regulations regarding the compensation of mortgage brokers. Before the financial crisis, brokers could receive compensation from both the borrower and the lender. Consumers did not know that the lender was paying the broker when they paid their fee. Additionally, brokers had incentives to steer consumers toward more expensive products or mortgages, and sometimes higher interest rates. Since the Great Recession of 2008 and 2009 and the resulting regulations that followed, the number of mortgage brokers has decreased.
key takeaways
The primary mortgage market is the market where borrowers can obtain a mortgage loan from a primary lender.
Banks, mortgage brokers, mortgage bankers, and credit unions are primary lenders and are part of the primary mortgage market.
Homeowners can deal directly with major lenders when shopping for a home loan by contacting their local bank.
Benefits of the Primary Mortgage Market
There are some benefits available to borrowers who transact in the primary mortgage market, which may include:
Low closing costs
Major lenders are usually locally owned banks, which means they do the credit screening and underwriting process. Underwriters review a borrower’s financial information and credit history to decide whether to extend credit or deny the loan. Also, local banks prepare all paperwork and documentation in-house instead of going through a centralized unit out of state as is the process for some large banks. The result can be lower fees with a local bank as they have less overhead compared to a larger bank. Also, if a mortgage broker was involved in finding the bank, a fee will also be charged. In short, opting for a locally managed bank for a primary mortgage can help lower closing costs.
small initial payments
Typically, the down payment on a mortgage is 20% of the purchase price of the home. However, a borrower can put down less money, and many primary lenders offer a 10 percent down payment.
For low-to-moderate income borrowers, an FHA loan offers a down payment as low as 3.5% of the home’s value. FHA is the Federal Housing Administration, which provides insurance to lenders so they can make loans to low-income borrowers.
However, a down payment of less than 20% triggers the need for the borrower to purchase private mortgage insurance, or PMI. PMI protects banks and lenders in the event that the borrower defaults on the mortgage. PMI is a monthly fee charged to the borrower until 20% of the mortgage loan has been paid off.
Flexibility
Because loan originators are typically locally owned banks, borrowers are more likely to be able to communicate with the people who have the final say, which is unlikely to happen at a national bank. Direct contact can provide flexibility if borrowers have a unique financial situation.
Flexibility may include offering a 15-year fixed-rate mortgage versus a 30-year mortgage if the borrower wants to pay off the loan sooner. Some of the advantages of a 15-year mortgage include lower total interest charges since it is paid off sooner. Additionally, borrowers can usually negotiate a lower interest rate since there is less risk that the borrower will default or default on the loan due to financial hardship. Of course, a big advantage of a 30-year mortgage is that it offers lower payments as they are spread over a longer period compared to other terms.
Adjustable rate mortgages are flexible options that are often offered for your consideration. ARM loans typically come with a fixed interest rate for a set period of time and then adjust annually based on a rate predetermined by the lender and borrower. ARMs typically come with a cap on how high the interest rate could be over the life of a loan, making it easy to calculate and budget for your maximum monthly payment.
