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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