The U.S. mortgage market is massive, so it’s no surprise that it’s actually composed of a primary and a secondary market.
The primary market serves the homebuying public. The secondary serves investors, but plays a big role in a borrower’s ability to get a mortgage and how much that home loan costs.
Key Points
• The primary mortgage market involves direct interactions between borrowers and lenders.
• The secondary mortgage market involves investors purchasing existing mortgage loans, often bundled into mortgage-backed securities, from lenders to earn returns.
• The primary market focuses on originating loans for homebuyers, while the secondary market provides liquidity to lenders by allowing them to sell these loans.
• Borrowers in the primary market can choose from various loan types, such as fixed- or adjustable-rate mortgages, whereas the secondary market deals with trading these loans among investors.
• The secondary market helps stabilize the mortgage system by replenishing lender funds, potentially lowering costs for borrowers.
Primary vs. Secondary Mortgage Market
The primary mortgage market links borrowers to home mortgage lenders. The secondary mortgage market allows investors to invest in existing mortgage loans in hopes of earning a return.
What Is the Primary Mortgage Market?
Any time a homebuyer takes out a mortgage loan from a reputable lender, that is the primary mortgage market in action. Homebuyers and mortgage refinancers can work with a mortgage broker or direct lender to find the right home loan.
Direct lenders include banks, credit unions, and online mortgage companies. They originate loans with their own money or borrowed funding. Many of them originate mortgages only to sell them to investors, though the lenders may retain the servicing rights.
What Is the Secondary Mortgage Market?
With the secondary mortgage market, investors such as pension funds, banks, and insurance companies buy mortgage-backed securities and try to earn a profit on them.
Why would lenders sell some of their home loans? Because they’re able to replenish their supply of mortgage funding and remove the risk they took on by making the loans.
The mortgages that Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corp.), the country’s biggest residential mortgage buyers, purchase are conforming loans. That means they conform to certain lending guidelines and loan limits. In 2024 the conforming loan limit for a single-family home was $766,550 in most housing markets. In 2025 it is $806,500.
Then there’s Ginnie Mae (the Government National Mortgage Association), which buys government-backed FHA, VA, and USDA loans and bundles them into securities to be sold on the bond market.
Recommended: Try This Mortgage Calculator
Example of Both Markets in Action
Betty Borrower decides she wants to buy a home and needs help financing the purchase. She shops for a mortgage with an attractive interest rate and low costs. She finds a good fit, applies for the loan, and is approved.
She moves in; her loan moves on. Betty gets a letter from her lender saying that her mortgage has been sold to another financial entity.
The mortgage buyer, which may be an investor or mortgage loan aggregator like Fannie Mae or Freddie Mac, can repackage home loans as mortgage-backed securities or hold them and collect the interest from borrowers.
Any investor who engages with the secondary mortgage market is buying Betty’s mortgage debt and many others’ and counts on the borrowers to pay the debt, with the investor pocketing a percentage of the profit.
Recommended: Guide to Buying, Selling, and Updating a Home
Why Are There Two Mortgage Markets?
They work hand in hand. Congress created the secondary mortgage market in the 1930s to give lenders a larger, steadier stream of mortgage funding to stabilize the country’s residential mortgage markets and expand opportunities for homeownership.
Pros and Cons of the Primary Mortgage Market
The primary mortgage market has its upsides and downsides.
Advantages of the Primary Mortgage Market
Mortgage loans are plentiful: Homebuyers can choose from an array of different types of mortgage loans from banks, credit unions, savings and loans, mortgage brokers, and online financial institutions.
Borrowers have options: The most popular choice is a fixed-term loan of 30 years, but some borrowers may opt for an adjustable-rate mortgage (ARM), in which the introductory rate is fixed for a specified period of time. The 5/1 ARM has a five-year fixed rate.
Rates are reasonable: The demand for conforming loans helps rein in interest rates for borrowers who meet the lending criteria, which include down payment and credit requirements in addition to conforming loan limits. (Nonconforming loans — loans that Fannie Mae and Freddie Mac cannot buy — include government-backed loans and jumbo loans. The rates may be even lower than conforming loan rates.)
Down Payment Can Be Low: For first-time homebuyers, a 3% down payment for a conventional loan may suffice.
Disadvantages of the Primary Mortgage Loan Market
Borrowers have to be vetted credit-wise: Mortgage lenders will review a potential borrower’s credit score in order to determine their eligibility for a loan. Applicants with a bad credit score may find it challenging to secure a mortgage other than an FHA loan.
Missed mortgage payments can have negative effects: Borrowers who miss payments may face a plummeting credit score or even foreclosure (but mortgage forbearance is an option).
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Pros and Cons of the Secondary Mortgage Market
Here are two ways to view the secondary loan market.
Advantages of the Secondary Mortgage Market
Replenishes lender funding: The secondary market keeps money flowing through the mortgage system in good economic times and bad.
Fuels lower mortgage costs: The secondary market can lead to lower costs for borrowers.
May be good for investors: Most mortgage-backed securities are issued or guaranteed by a government agency such as Ginnie Mae or by government-sponsored enterprises like Fannie Mae and Freddie Mac. The securities carry the guarantee of the issuing organization to pay interest and principal payments on their mortgage-backed securities.
Disadvantages of the Secondary Mortgage Loan Market
Not for the average investor: Common buyers of mortgage-backed securities include deep-pocketed financial organizations like insurance companies, banks, and pension funds. Because of the complexity of mortgage-backed securities and the difficulty that can accompany assessing the creditworthiness of an issuer, individual investors should use caution.
Investors won’t see the properties attached to the mortgages: Secondary mortgage loan buyers usually won’t physically see and assess the properties attached to the mortgages they’re buying.
The Takeaway
The primary mortgage market and secondary mortgage market have a symbiotic relationship. Most mortgage seekers will only be interested in the primary market: getting a home loan that suits their needs.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
FAQ
What is the secondary market for mortgages?
When homebuyers take out a mortgage, lenders can bundle similar types of loans and sell shares in this bundle to investors, including banks, pension funds, and mutual funds. Investors are willing to buy these shares because as long as the mortgages are paid off, the investors receive a steady stream of income over the life of the mortgages in the bundle.
What is a second mortgage?
A second mortgage is a loan that uses your home as collateral that you take out while you are still paying off the primary mortgage on your home. Home equity loans are often second mortgages.
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