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.