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Many mortgage firms must borrow funds on a short term basis
in order to originate loans which are to be sold later in the
secondary mortgage market (or to investors). When the prime rate
of interest is higher on short term loans than on mortgage loans,
the mortgage firm has an economic loss which is offset by
charging a warehouse fee.
Results when an existing assumable loan is combined with a
new loan, resulting in an interest rate somewhere between the old
rate and the current market rate. The payments are made to a
second lender or the previous homeowner, who then forwards the
payments to the first lender after taking the additional amount
off the top.