Financing 10% Flashcards
Points
Points on a mortgage allow you to pay an upfront fee at closing and less interest. A point equals 1% of the loan amount. For example, 1 point on a $100,000 mortgage is $1,000.
LTV ; Loan-to-Value- Ratio
Loan to Value Ratio is a way to assess lending risk that lenders examine before approving a mortgage. A loan assessment with a LTV ratio above 80% is higher risk, therefore the mortgage will have a higher interest rate. When the LTV ratio is at or below 80%, most lenders offer the lowest possible interest rates.
LTV ratio = mortgage amount (amount borrowed) divided by the appraised property value. , expressed as a %.
For example, you buy a home appraised at $100,00, and make a $10,000 down payment, you will borrow $90,000. Your LTV ratio is 90%.
Fannie Mae’s Home Ready and Freddie Mac’s Home Possible
Fannie Mae- the Federal Mortgage Association. Freddie Mac- the Federal Home Loan Mortgage Corporation.
Mortgage programs for low-income borrowers. Allows a LTV ratio of 97% (3% down payment) but require mortgage insurance until the ratio is at 80%.
PMI ; Private Mortgage Insurance
A type of mortgage insurance you might be required to pay for if you have a conventional loan. PMI protects the lender if you stop making payments on your loan.
To pay for the PMI, you can pay a monthly premium, an up-front premium, or both.
Interest
Compensation the debtor pays for the use of the lender’s money over time. Like a “rent”. The principal is the amount borrowed. Interest charges are typically expressed as an annual percentage rate.
Simple Interest
Method of calculating the interest charge on a loan.
Simple Interest= P× I × N where: P=principle I=interest rate N=Number of years or time of the loan
for example: if simple interest is charged at 5% on a $10,000 loan that is taken out for three years, the total amount of interest the borrower pays is $10,000 x 0.05 x 3= $1,500. Interest on this loan is payable at $500 annually, or $1,500 over the 3-year loan term.
Compound Interest
Interest that is calculated on the initial principal loan, and on all previously accumulated interest.
Step 1: Calculate the interest for 1 month using the PRB Diagram and then divide by 12 months.
Step 2: Calculate the principal portion of the monthly payment: Take the monthly principal and interest payment as provided in the problem and subtract the interest portion as determined in Step 1.
Step 3: Calculate the ending balance: Take the beginning balance and subtract the principal portion as determined in Step 2. (This process can be repeated as many times as necessary to determine the loan balance at the end of month two, three, four, etc.)
PITI ; Principal, Interest, Taxes, Insurance
are the sum components of a mortgage payment. Specifically, they consist of the principal (loan) amount, loan interest, property tax, and the homeowners insurance and PMI.
Promissary Note
a financial instrument that contains a written promise by one party to pay another party a definite sum of money. All the terms pertaining to indebtedness, such as the principal amount, interest rate, maturity date, date and place of issuance, and issuer’s signature.
They are debt instruments for people and companies to get financing from a source other than a bank.
Conventional Loan
a conventional mortgage is any loan not offered or secured by a government entity. They are available through private lenders like banks, credit unions, and mortgage companies.
Conventional loan interest rates tend to be higher than government backed mortgages. They also have fixed rates, which means the interest rate doesn’t change throughout the loan’s life.
FHA Insured Loan
an FHA loan is a mortgage insured by the Federal Housing Administration. They’re designed for low-to-moderate income borrowers. They require a lower minimum down payment and lower credit score than many conventional loans.
Amortized Loan
amortized loan is a repayment of a financial obligation over a period of time in a series of installments. As the interest portion of the payments for an amortized loan decreases, the principal portion increases.
Loans can be fully or partially amortized.
Fully amortized loan
the monthly principal and interest payments remain the same throughout the life of the loan.
Adjustable Rate Mortgage (ARM)
a loan in which the interest rate can be changed or adjusted by the lender during the loan term. The lender of an ARM is willing to originate the loan at a lower rate based on current economic conditions because it knows it can increase the rate in the future.
Bridge Loan
any short-term loan that’s issued as a form of temporary financing until a more permanent, long-term loan can be obtained. It bridges the gap between a need for immediate financing and the approval of an end loan.
