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What Is a Mortgage Bond?


Purchasing a home is not as simple as writing a check and taking possession of the property. Most people need to borrow money from the bank in order to purchase the home. The smaller bank that agrees to the mortgage with the new homeowner may not have all of the funds on hand to make the initial loan payment. That is where the mortgage bond comes in.

You Borrow Money From a Smaller Bank

When you sign a mortgage agreement with a bank, the bank pays the lump sum cost of the home that you are purchasing. You agree to pay the amount back to the bank over a series of months. You also agree to pay the bank a specific interest rate for the privilege to pay the loan back over time.

The Smaller Bank Borrows From a Larger Bank

If your bank does not have enough funds on hand to make the initial house purchase, it will take out a mortgage bond with a larger bank that can cover the costs. In essence, the bank sells your mortgage to the larger bank in order to meet the agreement they made with you. The larger bank allows the smaller bank to pay the loan back over time, exactly the way you will pay your mortgage loan back. The larger bank also charges a specific amount of interest above the loan amount that is agreed upon at the time the mortgage bond is issued. You will still deal directly with the bank you borrowed the money from, while your bank deals directly with the larger bank.

Both Banks Benefit From a Mortgage Bond

A mortgage bond is good for all of the parties involved. It allows you to borrow the money you need to purchase a house. It allows your bank to make money on the interest that they charge you for your mortgage loan. It also allows the larger bank to earn a profit on the interest that they will charge the smaller bank. The system provides a cushion so that more banks can offer mortgages and more people can purchase homes.

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