Purchase Mortgage Market

The purchase mortgage market is the portion of the primary mortgage market devoted to loans for new home purchases. The remainder of the primary market is made up on refinancing transactions.

Purchase mortgage market refers to the sector of the primary mortgage market made up of loans used to finance the purchase of a home. The second component of the primary mortgage market is the refinance mortgage market. The primary market is where mortgages originate, and three groups take part in the process. First is the borrower, who may be intending to occupy the property or treat it as an investment. Second is the lender, who is likely a bank or credit union. Finally, the mortgage broker brings the other two parties together.

It is worthwhile to distinguish between a purchase mortgage, which are bought and sold on the purchase mortgage market, and a purchase-money mortgage. In the latter case, the seller of a property offers a mortgage directly to the buyer in order to facilitate a transaction.

Once purchase mortgages have been successfully originated, lenders often bundle them with similar loans and sell them on the secondary market. Buyers on the secondary market are often government-sponsored enterprises such as Fannie Mae and Freddie Mac. They securitize the bundled loans and sell them as mortgage-backed securities (MBS). In some cases, they could be commingled with refinanced loans.

Over time, the relative sizes of the purchase mortgage market and refinance mortgage market fluctuate due primarily to movements in prevailing interest rates. When interest rates rise, borrowers are less likely to refinance and the purchase mortgage market will likely represent a larger portion of the primary market. When rates fall, refinancing can become more attractive to the borrower the the purchase mortgage market will shrink relative to refinancing.

Secondary factors in the fluctuation of the purchase mortgage market include available inventory, which can be driven by new home construction rates, and home prices. Rising home prices can lead to fewer new mortgages, as houses elude the purchasing power of many potential buyers. Employment levels and the cost of oil can impact overall mortgage originations as well.

A homeowner faced with the choice of a new purchase mortgage or refinancing of their existing mortgage should consider the pros and cons of both. In general, lenders will offer lower interest rates for purchases due to the fallout risk associated with refinances. One significant advantage of a refinance is that it allows the borrower to remain in the property and avoid the costs of moving.