Where Does the Money Come From for Mortgage Loans?

Where does the money come from for the loan?

Mortgage Loans: Let’s consider a simple example. We have a Bank A that has $ 100 as deposit from checking and savings account holder. Mr X requires a Loan for $ 50 and Mr Y requires a Loan for $ 50. If the Bank A lends money to these two borrowers which it can because they already have savings from the account holders in their bank. The bank wouldn’t be in a position to lend the third person who comes to the bank looking for a mortgage or any other kind of loan.

What is mortgage insurance and how does it work?

In order that banks do not face a shortage of any liquidity. The mortgage to Mr X and Mr Y is clubbed on the basis of risk the two mortgage poses and just like stocks on the exchange the bank sells the mortgage to any willing investor who has an appetite for such investment as Mortgage Backed Securities. MBS are considered to be the safest securities. Once sold on the exchange the bank immediately realizes its funds and now has the liquidity to meet the requirement of other mortgage borrowers.

So be it Banks or Lenders. In real life situation. The money is either being borrowed by one bank from another bank and they shop for rates just like mortgage borrowers do with much sophistication or lender borrowing money from a financial institution or the money is being raised by constant buying and selling of mortgage backed securities or from various other sources but primarily either by selling or borrowing.

While banks have funds from depositors but its not necessary that during every day transaction a bank would have enough funds to meet all its lending requirement from depositors savings alone.

As far as lenders are concerned. Lenders are not banks. These are institutions approved by govt to lend money only on the mortgage but they cannot provide car loan or credit card or any other kind of loan. Lenders are more relying on borrowed funds and selling mortgage as securities in the market.

While a bank may be a popular and unknown lender to a mortgage borrower could be in a position to offer lower rates than the bank itself. That is because if the money is to be considered as a perishable commodity like an apple. A lender may order 10 trucks of apples lend while a bank on a given day may order 5 trucks of apples to lend. It is but obvious that the lender would strike a better bargain on a price of apples because of larger quantity with mortgage borrowers if the apple is to be considered money like a commodity for easier explanation.

For more information visit www.affordable-payment.com or call 323-705-3191 if you are a California Mortgage borrower or If Texas Mortgage Borrower call 713-463-5181 EXT 154