Chapter 3: Mortgage Repayment Plans and Options Flashcards
Partially Amortized, Blended constant payment morgage
Fixed Rate
(3)
Fixed rate interest rate does not change.
Advantage: Security
Disadvantage: lack of saving
Partially Amortized, Blended constant payment morgage
Variabe Rate
(5)
Variable rate: interest rate fluctuates
Advantage: saving, ability to switch to a fix rate
Disadvantage: interest rate uncertainty, taking a step to prevent negative amortization, increase oustanding balance at end of term
How to prevent a negative amortization in a variable rate
(3)
- increase amount of each regular payment
- reduce total amount by paying a lump sum
- convert mortgage to fix
Partially Amortized, Blended variable payment morgage
Variable Rate
(3)
Advantage: saving, maintaining amortization
Disadvantage: interest rate uncertianty, payment fluctuation
Interest Only Mortgage
(3)
Does not have an amortization since there is no repayment of principal. Take out lump sum of money and only pay interest.
Advantage: increase cash flow, increase purchasing power for investment
Disadvantage: no principal reduction
Home Equity line of credit
(2)
Advantage: flexibility
Disadvantae: interest rate uncertainty
Interest Accruing mortgage
(3)
No repayment of interest or principal. At the end of the mortgage, the entire principal and interest is repayable
Advantage: cash flow
Disadvantage: increasing debt, reduce equity
Reverse mortgage
(3)
interest accuring mortgage typically reserved for 55 years of age
Advantage: cash flow
Disadvantage: reduce equity
Vendor Take back for purchaser and vendor
(4)
Purchaser
Advantage: salabiity, capital gain
Disadvantage: additional expenses, loss part of investment
Vendor:
Advantage: little to no down payment to purchase
Disadvantage: borrower money they can’t afford, higher interest
Prepayment option
Fully Open
(3)
Repay anytime without penalty
Advantage: flexibility, no penalty
Disadvantage: higher rate
Prepayment option
Partially Open Advantage and Disadvantage
(3)
Repay the mortgae in whole with penalty of 3 months.
Advantage: Flexibility
Disadvantage: higher rate, penalties
Prepayment option
Closed Advantage and Disadvantage
(2)
Advantage: rate
Disadvantage: lack of flexibility, penalties
3 month interest penalties
(2)
charges the borrower three times an average amount of monthly interest.
Outstanding balance x current rate / 4
Interest rate differential penalties
(2)
borrower current rate and lender current available rate for similar term
(Outstanding balance x (John current rate - North York current rate)) x number of years left
Repayment Option
Periodic payment increase
(3
Payment during the term of the mortgage
Advantage: saving for substaintial amount over time
Disadvantage: decrease in cash flow
Repayment Option
Accelerated mortgage payment
(3)
Increase payment requested once the mortgage has been advanced. Only way to pay a mortgage off faster is the increase amount of periodic payments.
Advantage: saving
Disadvantage: descrease in cash flow
Repayment Option
Lump Sum
(1)
- apply directly to principal amount
Repayment Option
Extended or shorten amortization
(2)
Increasing amortization: lowering mortgage payments or allowing the borrower to borrow an increase amount of funds
Shortening amortization: increase mortgage payment and reducing interest paid
Repayment Option
Cash back
(3)
On closing, a percentage of mortgage loan is paid to the borrower by the lender
Advantage: cash on closing
Disadvantage: higher rate, repayment of cash back
Formula for required to repay current lender
(1)
(cashback% x original mortgage amount x #months remaining)/ number of months in term
Repayment Option
Combined / bundled option
(2)
Advantage: flexibility with line of credit
Disadvantage: registered debt against title
Repayment Option
Portability Option
(3)
Allow the borrower to take the mortgage with him or her on their new home
Advantage: rate protection
Disadvantage: limited application
Repayment Option
Assumable options
(1)
allow a purchaser to assume to take over current homeowner debt on the property being purchased
Advantage: lower rate
Disadvantage: limited application
What mortgage option allows a borrower to pay off their mortgage during the term without penalty?
A fully open mortgage option.
Discuss the difference between accelerating a mortgage and using the increase payment option to pay the mortgage more quickly
(3)
The difference between these two options revolves around how the payment is increased.
In an accelerated mortgage the payment is calculated by divided the regular monthly mortgage payment by the required payment frequency and this is typically done prior to closing.
Conversely, the Increased Payment Option allows the Borrower to increase his or her payment, in many cases up to 100% of the original payment amount, during the term of the mortgage. Both options offer the Borrower savings over the life of his or her mortgage.
Discuss the difference between an open mortgage and a closed mortgage
An open mortgage can be repaid at any time while a closed mortgage may only be fully repaid at the end of the term or if the homeowner sells the property.
Why might a consumer be confused as to the difference between an open and closed mortgage
The terminology used in the mortgage industry regarding these options is not standard. Many lenders refer to an open mortgage with prepayment penalties as a fixed rate mortgage instead of an open mortgage, while others refer to this type of mortgage as a closed mortgage. Consumers and Mortgage agents must be aware of how each Lender describes its prepayment options.
Under what circumstances would a prepayment penalty be charged?
If the mortgage contract allows full prepayment of the mortgage with either a 3 month interest penalty or the interest rate differential penalty.
Describe a scenario which 3 month interest penalty would be charged
Typically, if the Borrower is prepaying the entire outstanding balance of the mortgage and the current rate charged by the Lender is more than what the Borrower is paying.
Describe a scenario under which an interest penalty would be charged
Typically, if the Borrower is prepaying the entire outstanding balance of the mortgage and the current rate charged by the Lender is less than what the Borrower is paying.
What is a bundled mortgage?
A bundled mortgage is a mortgage that combines a line of credit and a standard mortgage
What is the most common type of mortgage repayment plan in Ontario
The partially amortized, blended constant payment mortgage with a fixed rate is the most common type of mortgage repayment plan in Ontario.
A borrower has asked you for options regarding repaying his mortgage more quickly. Explain the options available to him and under what circumstances you would advise him to use these options.
(4)
- Obtain a fully open mortgage. This will allow the Borrower to repay all or part of his or her mortgage at any time without penalty or notice.
- Accelerate the mortgage. This will save considerable amounts over the life of the mortgage, as long as the Borrower can afford the larger payment.
- Increase the payment. If the Borrower’s cash flow increases he or she may decide to increase the size of the mortgage payment, thereby reducing the amount paid in interest over time.
- Make lump sum payments. If the Borrower can save money during the term he or she can apply this amount directly to the principal. This would be beneficial if the Borrower has paid down other higher interest debt, such as credit cards.
What is a vendor take back?
A mortgage provided by the vendor to the purchaser of the vendor’s property
How do you blend two mortgage rate?
Blended mortgage rate = (current mortgage/total new mortgage x rate) + (new mortgage/total new mortgage x rate)
What is the benefit of an assumable mortgage?
Lower Rate, If market interest rates are currently higher than the rate of the existing, assumable mortgage, it may be beneficial for the purchaser to assume the current mortgage.
What is the benefit of a portable mortgage?
Rate Protection, If rates are currently higher than the borrower’s contracted interest rate on the mortgage, they can benefit by keeping the lower rate and porting it to the new home
What happens to the amount of interest if an amortization is:
Shorten?
Extended?
Shorten: it decrease
Extended: it increases
