Mortgage Backed Securities: Where The Money Comes From

By Debbie Wilson
Loan Page Columnist

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When you apply for a mortgage, the company you make your monthly payment to rarely owns your loan. Rather, they are the "servicer" of your mortgage. But understanding how the refinancing process works can help you make better financial decisions. And this entails knowing more about mortgage-backed securities.

Most money from home mortgages comes from three major institutions: Fannie Mae (FNMA), Freddie Mac (FHLMC), and Ginnie Mae (GNMA). Once they purchase your loan, it gets put into a pool of loans, which then gets sorted into smaller ownership parcels. These smaller parcels are known as mortgage-backed securities. And because each parcel or security represents a diversified pool, your risk is much less than it would be with a single investment.

Mortgage Investments

Mortgage backed securities are sold on Wall Street to institutions or individual investors. These securities usually earn a higher interest rate than treasury bonds and thus tend to be more popular. By selling the mortgage-backed securities, the institution is able to obtain new funds, which in turn allows them to buy more mortgage pools. And so the cycle continues from loan to loan just like this.

Refinancing Options

Now that you are ready to refinance your home, do some research. Check out who will service your mortgage. You may notice that at times, your loan gets transferred to another company. That doesn't mean your loan was sold, however the right to service your loan was. What is more important is that you check out all your options, including interest rates, mortgage lenders, types of loans offered, and of course, lender reputations. You'll be glad you did!

About the Author
Debbie Wilson owns and operates a lakeside resort. Her previous experience includes profitability consulting for a national healthcare company. Debbie holds a B.A. in Business Management with a minor in Physical Education.

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