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5 Things You Should Know About Mortgages, but Probably Don't

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At first glance, the mortgage market seems simple enough. It's just a bunch of banks making loans, right?


If a person were so inclined, they could write a multivolume treatise on the complexities of the market for home loans in the United States.

But for both of our sakes, I'll spare you. I've instead queried a handful of experts in the field to uncover what, in their minds, are the most important things people should know about the mortgage market, but don't.

1. Banks don't make the rules
Bankers are often considered the bad guys -- and to a certain extent, I suppose that's fair given their role in the financial crisis.

When it comes to mortgages, however, it's important to recognize that they don't make the rules. "The regulators and the government-sponsored entities [Fannie Mae and Freddie Mac] make the rules," Gus Floropoulos of New York's Quontic Bank told me. "We are simply structuring the deal to fit the guidelines they say are acceptable."

This applies to everything from loan-to-value ratios, down payment requirements, and credit scores. The point being, says Floropoulos, "don't shoot the messenger."

2. Banks also don't dictate interest rates
Along these same lines, it's important to appreciate that banks have little to no control over interest rates.

Since the beginning of the 1970s, most home loans in the United States have been securitized by banks, packaged into mortgage-backed securities, and then sold to institutional investors.

Few if any conforming mortgages actually stay on a typical bank's balance sheet -- though Wells Fargo (NYSE: WFC  ) has proven to be a notable exception to this rule of late.

The net result is that interest rates are set in the MBS market, not by banks. "These securities trade daily like any other type of bond or stock," Floropoulos went on to note, and it's the price investors are willing to pay for them that dictates the underlying interest rates.

3. Banks ain't doing this mortgage thing for free
The fact that banks don't make the rules or set interest rates shouldn't be interpreted to mean that they're in the mortgage business merely out of the goodness of their hearts.

As Bob Van Gilder, a mortgage broker at Finance One Mortgage, told me (emphasis added): "Interest is paid in arrears on your mortgage. When you make your payment on November 1, you are actually paying for the previous month's interest and only a small piece of principal."

4. Being late on your payment won't ruin your credit
Given the horror stories of homeowners being unjustly foreclosed upon over the last few years, you may be surprised to learn that being late on your mortgage payment won't automatically ruin your credit.

"While your payment is due on the first of the month, it's not officially delinquent until after the 15th," explained Van Gilder. "You will have a late charge after the 15th, but it's not reportable to credit bureaus as a late payment."

Suffice it to say, this isn't an excuse to be late on your mortgage payment. I'm noting it rather to provide peace of mind in the event that you forget to pay your mortgage until a couple of weeks after the first of the month.

5. Not everybody pays the same rate
Even though conforming mortgages are often alike with respect to their terms and duration -- thus, the term "conforming" -- the same cannot be said for the rate mortgagees pay.

Known as risk-based pricing, people who are perceived to be at bigger risk of default are charged more for their mortgage.

"If you have a higher risk transaction, due to low down payment, low credit scores, high loan to value, etc., you will pay proportionally more than someone else," Matt Hodges, a sales manager with Presidential Mortgage Group said.

It's for this reason many mortgage professionals encourage prospective homeowners to reduce debt and clean up their credit histories prior to applying for a mortgage, as opposed to afterwards.

The bottom line
Getting a mortgage can be daunting, but rest assured that millions have gone before you, and millions will follow in your footsteps. If you're smart, you'll do your research ahead of time and bridge the knowledge gap between yourself and your lender. I hope this article serves as a jumping-off point in this regard.

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Read/Post Comments (5) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 12, 2013, at 3:25 PM, Dadw5boys wrote:

    Once you buy a home get 3 or 4 payments ahead and then gets at least $10,000 in the bank you can put on a money market to roll over and over let your money make money for you.

    Then relax and live !!!

  • Report this Comment On October 12, 2013, at 5:01 PM, fharrison431 wrote:

    Where was this article with number 1 after Obama blamed Bush for the financial mess? This could have been in the major news outlets and maybe we would not be in the mess we are in now. An article pointing out that the mess came about because progressives love to help people get mortgages whether they can afford them or not, CRA, go us in this mess. Articles about changes put in by Frank Raines, a Clinton appointee, replacing all the historical guidelines regarding ratios, credit, and amount of individual cash to the transaction may have put the blame for the mess on the actual perpetrators. Coming along 7 years later doesn't help much. We have had 2 elections since then.

  • Report this Comment On October 12, 2013, at 5:03 PM, lomonoq wrote:

    Warren does get the stock he just has someone else get it for him, they all cheat like that thats why hes rich, just waiting for them to fall and get caught .what happened to Trump cheating all those poor fools the news no longer reports that get it control

  • Report this Comment On October 12, 2013, at 11:05 PM, normgarry wrote:

    This list is RIDICULOUS.

    I have a better one.

    #5 30 YEARS is a LONG TIME - be sure you'll be employed or are employable for that time period.

    #4 Being late on a mortgage payment will almost certainly damage your credit if reported to the credit bureaus. ESPECIALLY if it happens more than once.

    #3 IF you take anything other than a 15-year fixed or a 30-year fixed, you are taking a huge risk.

    #2 The banks aren't even interested in talking to you unless you walk in the doors with at least $25,000 cash in hand.

    #1 At the end of the day, you're just a number to the bank. Be sure to stay on their good side.

  • Report this Comment On October 13, 2013, at 3:40 AM, btc909 wrote:

    #1 not all mortgages fall under Freddie & Fannie. This is why i'm SOL for any HARP programs.

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