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Finance > Loan Types, Terms and Issues > Flashcards

Loan Types, Terms and Issues Flashcards

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1
Q

Simple Interest =

A

principal x rate x time

To calculate the interest on a $2250 loan at a 7% interest per year after 12 months.

Formula:

P = principle, $2250.00
R = rate or interest 7% (.07)
T = time (12 months)
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2
Q

Add-on interest almost doubles the simple interest rate.

The formula for computing the add-on interest rate is:

A

AIR = 2 x I x C ÷ P (n + 1)

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3
Q

Compound interest is defined as interest which is computed on the principal amount plus the accrued interest

A

Compound amount = Initial deposit (1 + Interest rate)n

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4
Q

Describe a graduated payment mortgage

A

With a graduated payment mortgage (GPM), the monthly payment for principal and interest gradually increases by a certain percentage each year for a certain number of years and then it levels off for the remaining term of the mortgage.

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5
Q

How many GPM plans does FHA offer and how are they structured?

A

FHA has five plans available. Three of the five plans permit mortgage payments to increase at a rate of 2.5, 5, or 7.5 percent during the first 5 years of the loan. The other two plans permit payments to increase 2 and 3 percent annually over 10 years. Starting at the sixth year of the 5-year plans and the eleventh year of the 10-year plans, payments will stay the same for the remaining term of the mortgage.

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6
Q

List three ARM indexes. (See Screen 4 for other correct answers.)

A 
Certificate of Deposit Index (CODI) 
Treasury Bill (T-Bill) 
London Inter Bank Offering Rates (LIBOR)
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7
Q

What is an interest rate cap and how many are there?

A

Interest rate caps limit the amount of interest the borrower can be charged. There are two types of caps: periodic, which limit the amount the rate can change at any one time, and overall, which limit the amount the interest can increase over the life of the loan.

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8
Q

Describe a two-step mortgage.

A

The two-step mortgage is an ARM loan program in which the interest rate is adjusted only one time – usually five or seven years after the loan is originated.

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9
Q

List two advantages of growing equity mortgages.

A

The low up-front payments may make it easier for first-time home buyers to qualify for and afford a loan.
A GEM is usually paid off faster than a traditional fixed-rate mortgage.

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10
Q

Define a reverse mortgage and list three types.

A

With a reverse annuity mortgage, the lender is making payments to the borrower. There are three basic types of reverse mortgage:

Single-purpose reverse mortgages – These are offered by some state and local government agencies and nonprofit organizations.
Federally-insured reverse mortgages – These are known as Home Equity Conversion Mortgages (HECMs) and are backed by the U. S. Department of Housing and Urban Development (HUD).
Proprietary reverse mortgages – These are private loans that are backed by the companies that develop them.

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11
Q

What is a biweekly loan and what’s the advantage?

A

With a biweekly loan, the borrower pays half of the monthly mortgage payment every 2 weeks, rather than the full payment once a month. This is comparable to 13 monthly payments a year, which can result in faster payoff and lower overall interest costs.

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12
Q

Define an open-end loan and name one common type of open-end loan.

A

An open-end loan is an expandable loan in which the lender gives the borrower a limit up to which he or she may borrow. Each advance the borrower takes is secured by the same mortgage. A construction loan is a common type of open-end loan.

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13
Q

What two clauses are important to have in a blanket loan?

A

Release clause and recognition clause

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14
Q

What type of loan is very popular in the sale of new subdivision homes and furnished condominiums and why?

A

A package loan finances the purchase of a home along with the purchase of personal items. It is popular with both lenders and borrowers because they believe there is less risk of default. Borrowers can pay for the essential personal items over the extended period of the loan, rather than have to exhaust their reserves to purchase the items outright.

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15
Q

Describe a wraparound loan

A

A wraparound loan allows a borrower who has an existing loan to get another loan from a second lender without paying off the first loan.

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16
Q

Dan has a monthly income of $3000. What is the maximum Principle, Interest, Taxes and Insurance (PITI) payment that Dan can pay using the 0.28 front-end Debt To Income (DTI) ratio?

A

To get the maximum PITI, you multiple $3000 x 0.28 = $840/month. Dan can afford a maximum PITI of $840/month.

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17
Q

Dan decides to buy a new car before he buys a house and incurs a $50/month debt. Can Dan still afford a $840/month mortgage payment?

A

First, we calculate Dan’s back-end DTI ratio, which is ($840+$50)/$3000 = 0.30. Since this ratio is less than the typical 0.36 back-end DTI, Dan can still afford the $840/month PITI payment.

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18
Q

Dan has an annual salary of $65,000. If his mortgage payment (PITI) is $395/month and he has an additional debt of $609/month. Calculate Dan’s front and back end DTI ratios.

A

Dan’s front end ratio is 0.07 and his back end ratio is 0.19.

Explanation:

Step 1.

Total Monthly Debt = $395 + $609 = $1004

Monthly Income = $65,000 / 12 months = $5,417

Step 2.

Front End Ratio = PITI / Monthly Income

$395 / $5,417 = 0.07

Step 3.

Back End Ratio = Total Debt / Monthly Income

$1004 / $5,417 = 0.19

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19
Q

graduated payment mortgage (GPM)

A

the monthly payment for principal and interest gradually increases by a certain percentage each year for a certain number of years and then it levels off for the remaining term of the mortgage. The FHA-245 program is a popular graduated payment mortgage program.

20
Q

adjustable-rate mortgage (ARM)

A

the interest rate is linked to an economic index. The loan starts at one rate of interest, but then it fluctuates up or down over the life of the loan as the index changes. The loan agreement describes how the interest rate will change and when. The interest rate the borrower pays is usually the index rate plus a margin.

21
Q

Adjustment period

A

establishes how often the lender can change the rate – monthly, quarterly or annually.

22
Q

Interest rate caps

A

limit the amount of interest the borrower can be charged

23
Q

Payment cap

A

limits how much the monthly payment can increase.

24
Q

Sometimes lenders offer conversion options

A

This would allow the borrower to convert the ARM to a fixed-rate loan at certain times during the life of the loan.

25
Q

The two-step mortgage

A

an ARM loan program in which the interest rate is adjusted only one time – usually five or seven years after the loan is originated.

26
Q

growing equity mortgage (GEM

A

is a fixed-rate mortgage whose payments increase by a fixed amount over a given schedule for an established period of time, often the entire term of the loan.

27
Q

reverse annuity mortgage

A

the lender is making payments to the borrower. The RAM allows older property owners to receive regular monthly payments from the equity in their paid-off property without having to sell.

28
Q

There are three basic types of reverse mortgage.

A

Single-purpose reverse mortgages
Federally-insured reverse mortgages
Proprietary reverse mortgages

29
Q

shared appreciation mortgage (SAM)

A

is a mortgage in which the lender agrees to an interest rate lower than the prevailing market rate, in exchange for a share of the appreciated value of the collateral property.

30
Q

pledged account mortgage (PAM)

A

is a type of graduated payment mortgage under which the owner/borrower contributes a sum of money into an account that is pledged to the lender.

31
Q

Buy down

A

the lump sum payment that is made to the lender at closing usually comes from a builder as an incentive to the buyer or from a family member trying to help out.

32
Q

A renegotiable rate mortgage (RRM)

A

another type of variable rate mortgage. This mortgage is amortized over 30 years but must be renewed at three-, four-, or five-year intervals.

33
Q

bi-weekly payment mortgage

A

the borrower pays half of the monthly mortgage payment every two weeks, rather than the full payment once a month.

34
Q

The main benefit of a zero percent-down mortgage

A

is that it can enable a person to purchase a home now instead of having to wait to save for a down payment, which could take years.

35
Q

Lenders can use

A

a note and mortgage, a deed of trust or a land contract document in creative ways to meet the needs of individual borrowers. Let’s recap some of the different options that exist.

36
Q

Open-end loan

A

an expandable loan in which the lender gives the borrower a limit up to which he or she may borrow. Each advance the borrower takes is secured by the same mortgage. This loan is also known as a mortgage or deed of trust for future advances.

37
Q

Construction loan

A

a type of open-end mortgage, also known as interim financing. A construction loan finances the cost of labor and materials as they are needed and used throughout a building project.

38
Q

Blanket loan

A

covers more than one parcel of real estate, owned by the same buyer, as collateral for the same mortgage.

39
Q

Package loan

A

one that finances the purchase of a home along with the purchase of personal items, such as a washer, a dryer, a refrigerator, an air conditioner, carpeting, draperies and furniture or other appliances.

40
Q

Since the depreciation on mobile homes in the first few years is pretty steep

A

many lenders prefer to give mobile home loans with a 15-year term instead of the typical 30-year term.

41
Q

A purchase money loan is

A

most commonly a technique in which the buyer borrows from the seller in addition to the lender.

A hard money loan is any mortgage l

42
Q

A bridge loan

A

is a short-term loan that covers the period between the end of one loan and the beginning of another.

43
Q

allows a borrower who has an existing loan to get another loan from a second lender without paying off the first loan.

A

wraparound loan

44
Q

involves the lender sharing an interest in the property.

A

participation loan

45
Q

With long leases in place, lenders are willing to allow

A

tenants to pledge their interests as collateral for improvement loans. This is referred to as a leasehold loan.

Finance (16 decks)

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