Author: Ryann Cairns
The Federal National Mortgage Association, most commonly known as Fannie Mae is part of the secondary mortgage market. Under normal circumstances the average consumer is never aware of the secondary mortgage market and has no reason to become aware of the many services provided by the secondary mortgage market.
Generally, when an individual decides to purchase a home they contact either a local lending institution or some other mortgage company and complete an application for a mortgage loan. If everything checks out okay with the consumer's credit score and the fair market value of the prospective property is appraised to be at least as much as the selling price of the property then the homeowner will receive the mortgage loan.
This process is open to variables however; when the economy is experiencing any one of a number of factors. When the Federal Reserve feels it necessary, they may choose to direct banks to keep a specific amount of money held back in reserve that is not allowed to be used for the purposes of loans. In essence, this strategy is supposed to help control the economy.
While this may be a feasible technique, it also places some difficulties on consumers who may find it harder to obtain a home mortgage loan in years when the Fed has elected to limit the amount of funds available for home mortgage loans to consumers. Fortunately for consumers, the secondary mortgage market comes into play during this type of situation.
The secondary mortgage market purchases loans that have been made to consumers from banks. By purchasing the loans, secondary mortgage market agencies, like Fannie Mae, can insure that banks do not exceed the amount of money they are required by the Fed to keep in reserve and that they still have sufficient funds left to make more home mortgage loans to consumers. By wise utilization of the secondary mortgage market everyone from the Fed, to banks and finally consumers, win.
Fannie Mae Mortgage loans that are accessed by consumers will typically either be a fixed rate mortgage or an adjustable rate mortgage. There are advantages and disadvantages to both and consumers should fully understand both this before making a decision that will affect that finances for up 30 years-the length of their mortgage loan.
With an adjustable rate mortgage, the consumer is not locked into whatever the prime market interest rate happens to be at the time they originate their Fannie Mae mortgage loan. While the mortgage loan may start out at the prevailing prime market interest rate, if at any time that rate should fluctuate either up or down, then the interest rate at which the consumer's mortgage loan is tied will also fluctuate.
This can mean both good news and bad news for the consumer. First, the good news. If the prime market interest rate should drop, then the consumer's monthly home mortgage payment will also naturally drop as a result. This means the consumer can save a significant amount of money in interest as well as possibly be able to pay off their home loan sooner. The bad news, however; is that should the prime market interest rate rise higher than the interest rate at which the loan was originated, then the consumer's monthly mortgage payment will rise right along with it accordingly.
For consumers who depend upon knowing exactly how much their monthly expenses will total for budget purposes, this can cause serious financial problems. Adjustable mortgage rates make it much easier for consumers to access lower interest rates immediately, as they begin to drop. Refinancing can sometimes take awhile and there may be limits regarding the customer's eligibility to refinance. Customers who don't mind taking a few risks and who do not need to know exactly how much their monthly expenses will total may find that the adjustable interest rate Fannie Mae mortgage suits their needs.
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