Mortgage Loans In a Nutshell

Did you ever wonder where the money comes from to make mortgage loans? Or, how the interest rates are determined?

And the money goes round & round

The Federal National Mortgage Association (Fannie Mae) and theFederal Home Loan Mortgage Corporation (Freddie Mac) are semi-privatized financial institutions that buy mortgages and bundle them into financial securities and treat them like bonds. Then they sell the mortgage-backed securities to investors.

It’s those investor funds which keep money flowing to the mortgage finance system. After you get a mortgage, the lender sells the loan on the secondary market, probably to Fannie or Freddie. By selling the mortgage, the lender gets its money back quickly so it can lend the money again, to another mortgage borrower.

The secondary market and you

Without a secondary market, mortgage lenders would be more reluctant to lend to you, because the lender’s money would be tied up as you gradually repay it over the years. When the lender sells your mortgage, the lender gets the full amount of the loan back immediately, with a profit, which can then be reinvested.

Meanwhile, investors, predominantly “institutional investors,” such as employee retirement funds, buy these securities because they offer stable payments for the members of their institution.

It’s these investors in the secondary market who collectively determine the interest rate of your mortgage loan. Your lender offers you an interest rate that investors on the secondary market are willing to buy.

Ups and downs of bonds

As with stock and bond markets, prices and yields on the secondary market move up and down. When the economy is on an upswing, investors demand higher yields on mortgage bonds, forcing lenders to raise mortgage rates. In a market downturn, interest rates tend to drop for consumers

Step One of an Ideal Home Purchase

This is the first in a series of detailed discussions about the process of buying a home.  We will be following the outline provided on our website under the section titled “Specially for Buyers.”  Obviously, the steps are the same, whether buying or selling, however, buyers often focus on different aspects of a transaction than do sellers.  At the same time, agents often emphasize different actions depending on whether you are buying or selling.

For this particular series we will concentrate on purchasing a residential property, to be used as a private home.  While the generic process is very similar for commercial transactions, or for residential income property, we want to keep this simple.  If you’re considering rental property, residential or commercial, give us a call and we’ll arrange to bring you up to speed on that part of the real estate world.  As with any task to be accomplished, the first step is to line up your tools in preparation for doing the job. The most important tool a buyer has at his/her disposal is a licensed, competent, real estate broker/agent.

With that in mind, the first thing to do when you start considering buying a home is find a broker/agent to represent you.  What’s the difference between a broker and an agent, you ask?  The easy explanation is found in California State law.  Every agent is required to be employed by a broker, who is responsible for ensuring the actions of the agent comply with the laws and regulations governing real estate.  Because they are required to review the work of their agents, brokers have additional experience and education requirements.  (Some brokers, like myself, prefer to join an existing company as a broker-associate, but this is probably more detail than we need for the immediate conversation.)

You need someone you trust;

Buying a home is one of the biggest expenditures you’ll make in your lifetime.  Most people spend at least 10 years in each home they buy.  You want that to be a happy 10 years.  Ask for recommendations from family and friends.  The Bureau of Real Estate at www.dre.ca.gov/ has some tools to help you verify licensing status of brokers and agents.  Search the internet for recommendations, and for complaints.

who keeps you informed;

You don’t necessarily know the significance of any particular fact or detail about a given house.  It’s the responsibility of your broker/agent to explain details that go beyond common knowledge.  For example, the phrase, “Home is in adobe soils area,” doesn’t mean much to most people.  To an broker/agent it means the soil under the house is unstable, and requires special attention to prevent damage to the structure.  This is a detail you should to be informed about, including the process needed to keep your new home pristine.

explains each step;

Just as I am now explaining Step One, your broker/agent should explain each step in the process, and why that step exists.  A good example is Step 15, “Read and approve the HOA CC&Rs, if applicable.”  Let’s assume you have a German Shepherd and you’re buying a condo at the beach.  There will be CC&Rs, and they will specify what pets are allowed.  In most cases, there is a maximum weight restriction for pets.  It’s often 35 pounds, about half the weight of your German Shepherd.  Sometimes the limit is expressed by height, as in “no more than 18 inches at the shoulder.”  In this example, a German Shepherd exceeds the maximum for the HOA, which forces you to make a decision between your pet and the condo.  You can readily see that a knowledgeable broker/agent can play a huge part in helping you find the home best suited to your needs.

answers your questions;

The typical buyer only goes through the purchase process a few times in their life.  The process is complex, can be confusing, and is loaded with importance to you and your family.  Your questions should be answered as soon as possible, and as completely as possible.  Sometimes this can be a a brief verbal explanation, and other times will be a multi-step response, with the addition of a more lengthy written explanation.  However it’s handled, you need and deserve answers.

and knows the neighborhood.

When you’re interviewing to select a broker/agent, ask questions specific to the area where you plan to buy.  You can quickly determine expertise in the neighborhood with a few key questions.  The HOA pet limitation issue discussed above is a classic example.  A broker/agent experienced in the Beach Cities may not know the exact limits for every HOA, but they should certainly know the limits exist, and should consider it important information for you, the buyer.

SFR Sales in South Redondo Beach, June-August 2017

For the most recent three month period, house sales in Redondo Beach, south of Torrance Blvd, and west of Pacific Coast Highway totaled 21 units. The lowest sale price for $850k for a 3 bed / 1 bath home, while the highest sale was $2,610k for a 5 bed / 5 bath home.

The median price was $1,375k, for an older, 4 bed / 2 bath house. South Redondo Beach SFR sales