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The size of a loan a home buyer can get depends on what?
- -buyer's income, net worth, and credit history
- -value of property
- -features of the loan
Lenders offer different financing options depending on what
What are the basic features of a mortgage loan
- -how the loan is amortized
- -the length of the repayment period
- -the loan-to-value ratio
- -whether there is mortgage insurance or a guaranty
- -whether there is secondary financing
- -whether the interest rate is fixed or adjustable
What is loan amortization?
- -refers to how principal and interest are paid to lender over a course of the repayment period.
- -borrower is required to make regular installment payments that include some of the principal and interest
Most home purchase loans made by institutional lenders are
Full amortized loan
- -monthly payments are enough to pay off all the principal and interest by the end of the loan term.
- -higher interest first and lower principal; each payment interest is recalculated in to lower amounts, allowing principal to become higher; but monthly payments are the same amount.
- -towards the end of the loan term, the borrower's equity increases more rapidly.
What are the two alternatives to a fully amortized loan?
-a partially amortized loan or an interest-only loan
Partially amortized loan
- -payments of both principal and interest, but payments are not enough to pay off complete principal.
- -final payment is a balloon payment, where the borrower pays off the loan; can be done with cash or refinancing.
- -requires no principal payments during the loan term, or for a specified period at the beginning of the term
- -aka: interest-first mortgage
A repayment period aka loan term is what
number of years the borrower has to repay the loan.
What loan is considered standard?
30 year loan
The length of the repayment period affects two important aspects of a mortgage loan:
- -the amount of the monthly payment
- -the total amount of interest paid over the life of the loan
What are the pros and cons of a 15 year loan?
- -Pros: equity builds faster, decrease in interest paid, lower interest rate
- -Cons: higher payments, harder to be qualified for, unless you have a larger downpayment
Loan-to-Value Ratio (LTV)
Expresses the relationship between the loan amount and the value of the home being purchased: ex; price of home, $100,000 when an $80,000 loan and a $20,000 downpayment, the LTV is 80%.
The higher the LTV, the larger the loan amount and the smaller the downpayment.
true; a loan with a low LTV is less risky
High-LTV loans are available to ____ and _____ loan programs, but are now more readily available to more people.
-FHA and VA
What is the purpose of mortgage insurance or loan guaranty?
-to protect the lender from foreclosure loss; incentive for lenders to make for riskier loans.
In exchange for premiums, the insurer provides coverage for certain types of losses specified in the mortgage insurance policy.
Under a mortgage insurance policy, the insurer will indemnify the lender. This means what?
- -if the proceeds of the foreclosure sale aren't enough to pay off the entire remaining amount that the borrower owes the lender, plus the lender's other expenses, the insurer will make up the shortfall.
- -Coverage for certain fees depends on the policy
- -because of this the insurer also underwrites the loan, meaning, the borrower must meet the qualifying standards of the mortgage insurer as well as the standards of the lender.
With a loan guaranty a _________ agrees to take on secondary responsibility for borrower's defaults. Very similar to mortgage insurance, except, the guarantor's motive is to...
- -third party.
- -help the borrower, rather than make a profit
- -ex: VA loan
What forms can a loan guarantor be?
-private party, non-profit organization, or a government agency.
What is secondary financing? How do borrowers qualify and who is mainly in charge of restrictions and requirements of the secondary financing?
- -loan to pay part of downpayment or closing costs; sometime home buyer obtains two mortgages at once: primary loan (purchase price), and secondary loan.
- -Secondary financing may come from an institutional lender (most likely same as primary), the seller, or from a private third party, still the primary lender is in charge of restrictions and requirements; both payments don't exceed over a certain amount, and can still require the borrower to pay a small downpayment with their own funds, even though the secondary loan can cover it all.
- -The specific restrictions that a primary lender imposes depends on whether the primary loan is conventional, FHA-insured, or VA-guaranteed.
What is an Adjustable-rate mortgage (ARM)? What are the pros and cons?
- -lender adjusts loan's interest rate from time to time to reflect changes in cost of money.
- -Pros: great for buyers who plan on owning their home(s) for a few years. When interest rates are low, payments are low
- -Cons: When interest rates are high, payments are high, payments can change
A lender may hesitate to make a fixed-rate loan depending on the...
Future adjustable-rate mortgage rates are based on the upward and downward movements of that index. What is an index?
-a published statistical report that serves as a reliable indicator of changes in the cost of money.
ARMs may have some or all of these features, what are they?
-a rate adjustment period
-a mortgage payment adjustment period
-a lookback period
-an interest rate cap
-a mortgage payment cap
-a negative amortization cap
-a conversion option
- -Note rate: initial interest rate stated on promissory note; aka contract note; may discount rate for first year, aka teaser rate.
- -index; a statistical report that is used as an indicator of changes in the cost of money; lender's prefer more responsive indexes
- -Margin; the difference between the index rate and the interest rate that the lender charges the borrower; lender needs to cover expenses and make profit; size of margin makes the difference in the interest rates charged; usually 2-3%; the index plus the margin equals interest rate on the loan; lender's margin remains constant.
- -rate adjustment period; adjustment period for interest rate determined by the lender; could be 6 month, 1 year, or more; lender notifies borrower in writing of the change; ***Hybrid ARMs; not often; provide for a longer initial period for the first rate adjustment, with more frequent adjustments after that; ex; has an initial rate adjustment period of three years, with annual rate adjustment from then on; 3/1; first number is the number of years in the initial rate adjustment period, second number means subsequent rate adjustments will occur once a year; some borrowers who choose a hybrid ARM plans to sell or refinance their home before the end of the initial adjustment period.
- -Mortgage payment adjustment period; when the lender changes the amount of the borrower's monthly principal and interest payment to reflect a change in the interest rate charged on the loan; most adjust the same time as the rate adjustment period, lender adjust mortgage rate as soon as interest adjust; sometimes they adjust at different times depending on lender terms.
- -Lookback period; 45 days; loan's rate and payment adjustments determined by index 45 days before the end of the adjustment period.
- -Interest rate cap; protects borrowers from payment shock (rapid market increase); limits how much the interest rate can increase, regardless of the index; two types, 1. limit single adjustment period (ex; 1 year annual cap 2%) 2. limit on entire loan term (ex; 5% life-of-the-loan cap)
- -Mortgage payment cap; limits how much the lender can raise the monthly mortgage payment; some ARMs have only an interest cap and no mortgage cap; protect borrower from payment shock.
- -Negative amortization cap; a limit on the amount of unpaid interest that can be added to the principal balance; if a loan has a payment cap and no rate cap, the borrower may encounter this problem;**Negative amortization unpaid interest added to principal balance, increasing the amount owed
- -Conversion option; converting the ARM loan to a fixed loan during a limited time; required to pay a convert fee
The index plus the ______ equals the interest rate on the loan.
With ARMs, the index rate can fluctuate, but the ______ remains constant.
7/1 ARMs means what?
7 years of initial interest, then interest rate changes every year after that.
While protections against payment shock are important, steady rising interest rates and sharp payment increases are the worst case scenario for an ARM.
What characteristics determine how much a borrower can borrow?
- -type of loan
What will by initial rate be?
-depends on the cost of money when the loan is made.
How often will my interest rate change?
-stated in loan agreement; could be 6 months, 1 year or more
How often will my payment change?
-be familiar with the policies of the lender
Is there any limit to how much my interest rate can be increased?
-most ARMs have interest rate caps. An annual cap is usually 1-2%; a life-of-the-loan cap is usually 5-6%
Is there any limit to how much my payment can be increased at any one time?
-some ARMs have payment caps, but most keep payment increases under control with interest rate caps. When there is a payment cap, payment increases are usually limited to 7.5% of the payment amount per year.
Will my ARM involve negative amortization?
-most new ARMs don't, but they could
Unpaid interest added to the loan balance is referred to as..
All of the following are disadvantages of a 15-year mortgage, except:
a. the interest rate is higher
b. the monthly payments are higher
c. it may mean buying a smaller house
d. a larger downpayment
Which loan-to-value ratio would represent the greatest risks to a lender?
(this multiple choice question has been scrambled)