How Mortgages REALLY Work

When it comes to buying a home, most people require financing in the form of a mortgage. A mortgage is a type of loan that allows a person to purchase a property by borrowing money from a lender. Mortgages can be quite complex, so it is essential to understand how they work and the various parties involved.

Mortgages are typically repaid over a period of 15 to 30 years, with the borrower making monthly payments that include both principal and interest. The principal is the amount borrowed, while the interest is the cost of borrowing the money. The interest rate on a mortgage can be fixed or adjustable, and it determines the amount of the borrower's monthly payment.

One of the key players in the mortgage market are Fannie Mae and Freddie Mac. These are two government-sponsored enterprises (GSEs) that were created to increase the availability of mortgage credit in the US. Fannie Mae and Freddie Mac purchase mortgages from lenders, allowing lenders to free up capital and provide more financing to borrowers.

The primary role of Fannie Mae and Freddie Mac is to provide liquidity to the mortgage market, which helps to keep mortgage rates low and make home ownership more accessible for Americans. In addition, they help to standardize the mortgage process by establishing underwriting standards and offering mortgage-backed securities (MBS) to investors.

Mortgages are often sold on the secondary market, which is where Fannie Mae and Freddie Mac come in. The secondary market is a financial market where mortgages and other loans are bought and sold. Investors in the secondary market can include banks, hedge funds, and other financial institutions.

Mortgages are packaged together into pools, which are then sold to investors as MBSs. An MBS is a security that represents a share in a pool of mortgages, and it allows investors to buy into the mortgage market without actually owning the individual mortgages. The interest and principal payments from the mortgages in the pool are passed through to the MBS investors.

The secondary market provides liquidity to the mortgage market, which helps to keep interest rates low and ensure that lenders have access to capital to continue making loans. Fannie Mae and Freddie Mac are important players in the secondary market, as they purchase and securitize a large portion of the mortgages in the US.

In summary, mortgages are an essential part of the home buying process, and Fannie Mae and Freddie Mac play a critical role in the mortgage market. By providing liquidity and standardizing the mortgage process, they help to ensure that Americans have access to affordable home financing. The secondary market also plays a critical role in providing liquidity and allowing investors to participate in the mortgage market. Overall, understanding the various players and mechanisms involved in the mortgage market can help borrowers make informed decisions about financing their homes.