Chapter 14 - Types of Financing Flashcards
Variable Rate Mortgage
Interest rate could be adjusted by lender during the 30 year life of the loan to reflect the rise and fall of interest rates paid to savers and lenders
Adjustable Rate Mortgage (ARM)
A mortgage on which interest rate rises and falls with changes in prevailing interest rates
ARM Main Requirement
Interest rate must be tied to some publicly available index that is acceptable by both borrower and lender.
ARM Benefit to Borrower
- ARMs carry an initial interest rate that is lower than the rate on a fixed rate mortgage
- If market interest rates fall, borrowers monthly payment will fall
ARM Disadvantage to Borrower
If market rates rise, borrower will pay more
Index Rate
Most popular is the one year maturity treasury - Published by Federal Reserve based on daily calculations
Margin
The amount added to the index rate that reflects the lenders cost of doing business
- 2-3%
- Stays constant
Adjustment Period
Amount of time the elapses between adjustments - Commonly one year
- When rates are rising, longer adjustment periods benefit the borrower
Interest Rate Cap
- Lenders are required to disclose
- How much the interest rate can increase for any one adjustment period
- Most popular is 1-2%
Payment Cap
Sets limit on how much the borrower’s monthly payment can increase in any one year
- Most popular is 7.5%
Negative Amortization
Accrual of interest on a loan balance so that, as loan payments are made, the loan balance rises
- Set limit of 125% of original loan balance
Graduated Payment Mortgage
Mortgage with and interest rate and maturity that are fixed, but the monthly payments gradually rise, because the initial monthly payments are insufficient to fully amortize the loan
- Common during periods of high inflation
Equity Sharing
An arrangement whereby a party providing financing gets a portion of owners profits
Shared Appreciation Mortgage (SAM)
- Offers interest rates of 1-2% below market value
- Lender earns about half the increase in appreciation over the term of the loan
Package Mortgage
A mortgage that secures personal AND real property
- Borrower can finance major appliances at the same rate as the real estate
Blanket Mortgage
A mortgage secured by 2 or more properties
Reverse Mortgage
- Must be 62 to qualify.
Payments made to home owner by lender either in one lump sum (Reverse Annuity Mortgage - RAM) or in monthly payments
Lender is repaid after home owner dies or property is sold
Construction Loan - aka Interim Loan
Short term loan for new construction or remodeling of an existing structure
Blended-Rate Loan
A refinancing plan that combines the interest rate on exiting mortgage loan with current rates
Equity Mortgage
- Lender agrees to make a loan based on the amount of equity in a borrowers home
- Max loan is 70-80% of homes value minus any first mortgage or other liens against the property
Affordable Housing Loan
- Low income = No more than 80% of median income for area
- Moderate income = No more than 115% of median income for area
Seller Financing
A note accepted by a seller instead of cash
Wraparound Mortgage
A mortgage that encompasses any existing mortgages and its subordinate to them
Subordination
Voluntary acceptance of a lower mortgage priority than one would other wise be entitled to
Option
A right for a given period of time to by, sell or lease the property at a specified price and terms
The purpose of an ARM is to more closely match what the lender received in interest to
The yield available from other types of investments
A borrower is considering an ARM mortgage from the first lender at a 2% margin and a comparable loan from a second lender at a 3% margin. The loan from the first lender would result in
Lower loan payments
ARM mortgages with teaser rates are avoided by mortgage insurers because
They can lead to early foreclosure when the rates are increased
Jeff has a blanket mortgage, can he sell one of the properties?
If the mortgage contained a partial release clause, it would be possible to sell a property before the entire mortgage debt was repaid.
A woman is building a new home and has secured a construction loan from her local bank. When the house is finished, she plans to pay off the construction loan with a permanent loan from a savings and loan association. Will the permanent loan be a take-out loan?
Yes. A take-out loan is secured from another lender to pay off a construction loan. Construction loans are considered high risk and usually cost a higher interest rate than the less risky permanent loan
A corporation build a building to its exact specifications. It wants to pull out its capital to use for other purposes. The best financing option is the
Sale and leaseback. The owner occupant sells his property in a sale leaseback and then remains as the tenant
A couple own their home which is presently worth approximately $150,000. They have an existing fixed rate mortgage of $50,000 on their property. To help pay for their child’s college expenses, they have arranged for an equity loan on the home. How is the interests rate determined?
The interest rate will probably be based on the prime rate plus the lender’s margin of 1-3%
When would a wraparound mortgage be discouraged?
Wraparound mortgages cannot be used if there is a due-on-sale clause.
A sale may be made and financed under a contract for deed
By combining wraparound financing with an existing mortgage on the property, provided the existing mortgage does not contain a due-on-sale clause. It is not necessary for the property to be owned free and clear. Contract for deed may be used on any property type and the seller can approve the buyer without following any guidelines
Possession without the need to immediately finance the full purchase price of a property can be achieved by using a
Lease with option to buy. This eliminates the need for immediate financing of the full purchase price of the property.
A graduated payment mortgage is appealing to which group of buyers?
Young professionals. They are more likely to see increases in their incomes so that they can more easily afford the increasing payment
One major disadvantage to the borrower of an ARM is
Possible negative amortization
