The secondary market is when the bank (or entity) that makes the
origional mortgage with the client then sells the mortgage to another
bank (or entity). The second bank usually pays a lump sum payment to
the first bank for the right to collect the remaining monthly payments
from the customer.
Prepayment has 2 similar meanings... First, prepayment may mean any
additional amount of payment on the mortgage beyond the specified
monthly payment (it could be $1 extra or it could be a full extra
payment). In essence, you are "prepaying" (or paying early) that
amount in order to decrease your principal and therefore decrese the
interest you are charged over the rest of the term of the loan
(ideally... some mortgages are set up in such a way that you cannot
avoid the interest no matter what).
Second, prepayment may mean paying off the loan before the term of the
loan is up. For example: if you have a 30 year mortgage and pay it
off in 20, this can happen by paying a little extra every month for 20
years, by paying normal amounts for 20 years and then making 1 large
payment, or anywhere between those 2 scenarios.
I don't know much about mortgage back securities, but it sounds like
the investment is essentially loaning the money to collect typical
interest from a mortgage. Most mortgages today are between 5% and 8%
and the higher the interest rate, the higher the risk of non-payment
(in which case the loaner... the bank... would receive the house).
Other investments seem much more beneficial to me. |
