Module 2.3 Flashcards
What are the six basic mortgage transactions
- purchase
- renew
- switch/transfer
- refinance
- borrow equity
- payoff
What are 5 calculations related to purchases and/or builds
calculating monthly mortgage payments (details in Session 2-2-2: Manipulating loan variables)
interim financing
assumed mortgages or second mortgages
purchase plus improvements (renovation) mortgages (details in Session 2-4-1: Understanding mortgage products)
builder’s loan/draw mortgages (details in Session 2-4-1: Understanding mortgage products)
What is Interim Financing
interim financing (also called bridge financing or gap financing) is a short-term loan for the purpose of “bridging the gap” between the closing of a sale and the closing of a purchase, particularly if the borrower is using sale proceeds for the down payment.
Lender conditions for interim financing
The lender that arranges the mortgage for the purchase usually provides the interim financing, but only once the related sale and purchase deals are firm and all conditions are removed on both transactions. The lender confirms this by requesting copies of the purchase contracts for both properties.
what is top-up and combine deal
borrowing additional funds and adding them to the current mortgage amount. Interest rate of new money is combined (by weighted average) with the int rate for the old money. Avg rate is then applied to new loan.
Maximum amount and term for interim financing
The dollar amount of interim financing provided is usually whichever amount is less: either the down payment or the net equity in the current property. The maximum term for interim financing varies from lender to lender but is typically about 45 days. Some lenders may consider longer financing periods but will want to register a second mortgage on the title of the property.
Fees to arrange interim financing
There is usually a fee for arranging interim financing in addition to the interest on the loan.
The fee can range from a minimum of about $250 (for prime lenders) to 1% to 2% of the total loan amount (for private lenders). Interest rates on interim financing are calculated on a per diem (per day) basis and vary widely depending on the type of lender.
Covering a difference in value with a second mortgage
Because the price of the property is often higher than when the seller mortgaged it, sometimes the person assuming the mortgage has to make up the difference in mortgage value by taking out a second mortgage on the property. In such a case
The interest rate for the assumed mortgage and the interest rate for the second mortgage provide a weighted average interest rate;
OR
The buyer can refinance for a new first mortgage to cover the value of the assumed mortgage and any shortfall due to appreciation in property value. This is known as a refinance title transfer and often requires independent legal advice for all parties.
What are potential benefits of a second mortgage for assumed mortgages
- Even with the higher second mortgage interest rate, assuming an existing first mortgage and obtaining a second mortgage is sometimes more economical than refinancing in terms of interest costs.
The non-interest costs to arrange a second mortgage (such as insurance premiums and legal, appraisal, and lender fees) are typically less than those to arrange a first mortgage.
Should the buyer choose to place a second mortgage against title, the seller avoids the cost of discharging the existing mortgage early (which involves a prepayment penalty). The seller may pass these savings on to the buyer by reducing the purchase price of the house by an equivalent amount. Be aware that most lenders will not allow a second mortgage in the event the first mortgage is insured. There are exceptions however when both the first and second mortgage are held by the same lender. Please consult lender internal guidelines to dictate.
Potential disadvantages to assumed second mortgages
For some buyers, the payments on an assumed first and obtained second mortgage together might be higher than the payments for a new first mortgage even though the combined interest rate might be lower. Or, the combined payments might be too large for the borrower to manage.
What is better, to take a assumed mortgage and/or second mortgage
Although the payments may be higher to take on the second mortgage along with assumed, the loan amount is considerably less with a better interest rate combined.
Comparing options for blended interest rates, assumed and second mortgages
Janice is interested in an $180,000 house and has a down payment of $36,000. The seller has $125,000 left on the mortgage and is paying an interest rate of 8%. Today’s interest rate is 10.5% on first mortgages and 13% on second mortgages. Janice’s two options are as follows:
Option 1: Refinance with a new first mortgage of $144,000 (purchase price minus down payment) at the current interest rate of 10.5%.
Option 2: Assume the existing mortgage of $125,000 at the lower interest rate of 8% AND arrange a second mortgage to make up the shortfall at an interest rate of 13%.
The question for Janice is whether combining the two interest rates (option 2) will be less interest than obtaining a new first mortgage (option 1). Although the interest rate for the second mortgage is higher, the loan amount is considerably less. How does combining the assumable rate with the second mortgage rate compare with the new first mortgage rate?
If Janice assumes the seller’s existing mortgage of $125,000 at the seller’s existing mortgage terms of 8%, then
formulaformulaformula
Janice will also need a second mortgage for the shortfall in the purchase price: a loan of $19,000 (loan amount of $144,000 less assumed mortgage amount of $125,000). Therefore
formulaformulaformula
Add the two interest rates to find the combined interest rate for option 2:
6.94% + 1.72% = 8.66%
Compare the two rates (10.5% for option 1 versus 8.66% for option 2): Option 2 (assuming and getting a second mortgage) is cheaper for Janice in terms of the interest rate.
Example 2: Combining interest amounts rather than interest rates
The second method of combining interest uses the simple interest formula (I = P x R x T) to calculate and compare the dollar amounts of interest. Recall Janice’s scenario.
Option 1: Refinance with a new first mortgage of $144,000 at the current interest rate of 10.5%. Therefore I = P x R x T I = $144,000 x 10.5% x 1 year I = $144,000 x 0.105 x 1 year I = $15,120
With a new first mortgage, Janice would pay $15,120 in interest in year one.
Option 2: Assume the existing mortgage of $125,000 at the lower interest rate of 8% AND arrange a second mortgage to make up the shortfall at an interest rate of 13%. Therefore
Interest amount on assumed first mortgage I = P x R x T I = $125,000 x 8.0% x 1 year I = $125,000 x 0.08 x 1 year I = $10,000
Interest amount on second mortgage I = P x R x T I = $19,000 x 13.0% x 1 year I = $19,000 x 0.13 x 1 year I = $2,470
$10,000 + $2,470 = $12,470
With an assumed first mortgage and a second mortgage to make up the difference, Janice would pay $12,470 in interest in year one.
Compare the two interest amounts:
Option 1 = $15,120 and Option 2 = $12,470
Therefore, Option 2 (assuming and getting a second mortgage) is cheaper in terms of the amount of interest paid.
What are the two methds for interest combining
- Combines interest rates
- Combines interest amounts
Renewal Transactions
Because a renewal is not a new mortgage, there is no need to re-register the mortgage on title and no new money is involved.
What are the 6 different borrower options for renewing
selecting a new term length and type (such as open or closed),
selecting a new interest rate option (such as fixed, variable, adjustable)
selecting a new payment frequency or increasing the payment amount
decreasing payment amount by extending the amortization period
making extra payments towards principal
What are 6 possible lender requirements at renewal time
review the mortgage repayment history and offer a renewal at current
may re-evaluate credit, income, and value to see if they want to renew and to determine appropriate rates/fees for renewal.
Some may insist upon a minimum of 20% equity in the property, which may require the borrower to make a lump-sum payment or down payment. This may affect the borrower’s ability to qualify.
Some may have documentation requirements such as proof of insurance, proof of property tax paid or first mortgage balance.
If the economic climate at renewal time is significantly different from when the mortgage was new, some lenders may have adjusted their income qualification requirements and credit score minimums. This may affect the borrower’s ability to qualify.
If the value of the property has decreased, some may demand full requalification. If the value has decreased significantly, the borrower may no longer be able to qualify for a mortgage on that property.
what are general timelines for renewals
- 2 months prior to renewal the lender typically sends offer.
- Borrowers should start searching 6 months prior.
Some things to consider when switching to a new lender at renewal time
Switching to a new lender may require the borrower to go through a qualification process similar to the one required to get the original mortgage, however. Changing lenders may impact creditor life, disability and/or critical illness coverage if their current policy is lender specific. Increased age or a change in health may increase the cost of coverage.
What are the documents required for renewal transactions
- Payoff statement (shows remaining balance and terms of the loan agreement)
- Current interest rate (as compared to new rate)
- Property ownership information ( show that name on the payout statement match title)
- Mortgage Statement (shows how much the borrwer paid last year, how much monthly pmt, how prop tax is paid, mortgage in arrears, or any other mortgages on title)
What are characteristivs of Switching/Tranfering
does not involve new money
typically does not require any change in borrower registration on title
typically occurs near the end of a term
can occur before the end of the term, as long as the borrower is willing to pay any applicable early payout penalties
new lender may require the borrower to go through a qualification process similar to the one required to get the original mortgage
title is switched to the new lender
Is the borrower responcible to pay fees when they change title (marriage or divorce)
Yes
Refinancing at time of switch
Some new lenders will allow refinancing at the time of a switch.
Sometimes the current lender will counter against a switch by offering to top up and combine. This may also be called top up and blend.
Sometimes the current lender will counter against a switch and refinance with an offer to combine and extend. This may also be called blend and extend.
In either of these cases, the borrower continues to pay the rate from the existing mortgage on the outstanding mortgage balance and a new rate on any new money.
What are two main points of refinancing
Refinancing is a way to change an existing mortgage agreement using the instrument of a new first mortgage to achieve the end of making the change(s). It is not simply making a change to the mortgage agreement: The current mortgage is actually paid out (discharged) using funds secured under a brand new first mortgage that has different conditions or features that will help the borrower to achieve his or her goal(s).
Refinancing affects the amount of the mortgage principal in some way, usually by increasing it. It may also amortize the principal over a different length of time.
Refinancing and switch
Refinancing can be done through either the current lender or when switching to a different lender. If the borrower switches to a new lender, however, s/he will have to go through the entire qualifying process to be approved for the refinanced mortgage.
What are reasons a borrower will refinance
- falling interest rates (might be able to find a different rate)
- Rising Interest rates (VRM and switching to fixed)
- Debt consol
- Borrowing more money by taking out equity (equity take out)
- Borrowing more money by topping up the mortgage amount (topping up and blending)
- Borrowing more money by combing and extending the mortgage (Blend and extend)
- Change in borrwer situation
- Title Changes/release of covenant
What are disadvantages of refinancing
- costs are higher (legal fees, title reg, appraisal fees)
- may break term of current and pay penalties
what is payment shock
is a significant and sudden increase in monthly debt obligations that may make fulfilling difficult
what documents are required for Refinance
- payout statement
- current interest rate
- penalty amount for breaking the term of the loan
- property ownership info
- mortgage statement
3 reasons a borrower would borrow equity
to access funds for renovations/home improvements
to consolidate debt and/or repair credit
for any number of personal reasons, e.g., to finance a large, one-time expense, such as purchasing a car or home appliances; boosting RRSP contributions; returning to school; buying an investment property
Two ways to borrow equity
- second mortgage
- secured line of credit
How to calculate outstanding balance
renewing – If a borrower is at the end of the mortgage term and wants to renew the mortgage, the outstanding balance must be determined before any other calculations (such as new monthly payments) can be done.
refinancing – If a borrower wants to renegotiate terms or pay out the mortgage before the end of the term, the outstanding balance must be determined before any other calculations (such as payout penalties and new monthly payments) can be done.
Can you calculate an exact outstanding balance yourself
no only the lender can
What info do you need to estimate remaining balance
verify the accounting of the historical record of payments for the original mortgage term;
identify the balance in the tax account (in cases where payments made to the lender include interest, principal, and taxes); and
identify a per diem (daily) interest rate (in the event the mortgage is paid out or assumed on a date other than the normal payment date).
formula for oustanding balance if 50K more is borrowed on 250K on original 5.5% rate to new rate at 7.5%
250/300k= 83.3% 50/300k = 16.6%
then multiply each portion of the loan by the appropriate interest rate
- 3% of new total loan amount x .055 = 4.58%
- 6% of total new loan amount x .075% = 1.25%
then add both rates = 4.58+1.25 = 5.83
