Where does mortgage money actually come from? When you get a $500K mortgage, who actually writes the checks? Most people have no idea. Does it come from a bank? Does it come from the government or some large quasi-governmental agency like Fannie Mae or Freddie Mac? It all seems so confusing and the numbers are so big that they become abstract. But an understanding of where the cash comes from is the first step to understanding how the mortgage industry operates.
You can effectively break down the source of money into two broad categories. On the one hand, you have banks that recycle money thats been deposited into personal and corporate accounts. We all have bank accounts; checking accounts, savings accounts. That money all belongs to us and the bank pays us interest on it. But they, in turn, lend that same money out to people who want to borrow it.
These banks then charge their borrowers a higher interest rate than they offer to their savers. Thats how they make their money. They charge whats called a spread between their borrowing interest rates and their deposit interest rates. In fact, banks can even lend out more money than they physically have on deposit,...
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