Session 13 Unit 1: Loan Types and Sources Flashcards
Any loan in which periodic payments go toward both principal and interest. In a typical amortized loan, most of the initial payments go toward interest, with ever-increasing amounts going toward the principal (the loan balance), until the loan is paid off. For instance, a 30-year fixed-rate loan will be fully amortized in 30 years.
Amortized loan:
A typical amortized mortgage loan that includes principal, interest, taxes, and insurance in each (usually monthly) amortized payment. A common acronym for this kind of loan is PITI (principal, interest, taxes, and insurance).
Budget mortgage
A loan where the principal and interest payment remains the same over the life of the loan.
Fixed-rate loan:
This is a fixed-rate mortgage where the monthly payments increase over time according to a set schedule. The interest rate remains the same, and there’s no negative amortization. The first payment is a fully amortizing payment. As the payments increase, the amount greater than a fully amortizing payment is applied directly to the principal balance, reducing the life of the term and increasing the borrower’s interest savings.
Growing equity mortgage
A loan where the rate is adjusted, usually annually, based on the behavior of the economic index with which it’s associated (e.g., the consumer price index). The margin is the number of percentage points added to the index to determine the rate and is constant throughout the life of the mortgage; the index value is the variable. If the index is 5% and the margin is 2%, the fully indexed rate is 7%. If the index is 8%, the margin is still 2%, so the indexed rate is 10%. An adjustable rate mortgage with a lifetime cap has a maximum rate that may be charged at any point over the life of the mortgage. So if an ARM has an interest rate of 5% and a lifetime cap of 7%, the maximum that may be charged is 12%. Lifetime caps are part of the mortgage’s interest cap structure, which includes an initial, periodic, and lifetime cap. The initial cap is the value that limits the amount that interest can adjust at the mortgage’s first interest rate adjustment. The period cap (or periodic cap) limits the amount the rate can adjust at subsequent adjustment dates. An adjustable rate loan is typically an amortized loan.
Adjustable rate mortgage (ARM)
A mortgage loan alternative that allows the interest rate to be renegotiated periodically. The loan can be either long-term with periodic adjustments or short-term with more frequent rate adjustments.
Renegotiable rate
The borrower only pays the interest on the loan for a set number of years—usually between five and seven. After the term is over, the borrower must either pay off the entire loan principal in a lump-sum payment, or will need to finance the principal through another loan. Also known as term or straight-term loan.
Interest-only:
A payment that gradually adjusts (usually upward) based on a pre-determined schedule and amount. The initial payments are less than what would be a fully amortizing payment, which creates negative amortization. This type of payment plan can make payments easier in the beginning when income is often lower.
Graduated payment
This type of loan is designed for the self-employed or those paid on commission. A high credit score and slightly higher interest rates are characteristic of these types of loans. Since 2008, the standards for mortgage qualifying have become stringent to the point that low-doc loans are now rarely available.
Low documentation (low-doc
A temporary (usually 90-day) loan that provides funds in addition to an existing loan until permanent financing can be obtained. Often used for buyers who haven’t yet sold one property, but want to purchase a new one. Best used when the buyer’s current home is already under contract.
Bridge loan (swing loan)
Temporary financing for construction purposes. The developer submits plans for a proposed project, and the lender makes a loan based on the property appraisal value and the construction plans. The entire loan isn’t given at once; disbursements are made at intervals as phases of construction are completed. Upon completion, the lender makes a final inspection, closes the construction loan, and converts the loan into permanent, long-term financing. Construction loans involve risk for the lender (they are essentially loaning on land, air, and a promise to build) and usually come with a higher rate.
Construction mortgage
A loan with a lump sum payment, usually at the end of a loan period. The balloon loan may be paid as an interest-only loan for a period of time and then be paid off all at once. It may also be a partially amortized loan, in which case it’s paid off through a series of amortized payments with a balloon payment at the end of the term. For example, a lender may agree to amortize the loan over a 30-year period with a balloon payment at the end of 10 years. This equates to lower monthly payments, but borrowers must be able to pay off the entire loan at the end of 10 years.
Balloon loan:
A loan from the equity of a home. If the property is owned free and clear, the home equity loan is a first mortgage. If not, it’s a second or junior mortgage. Rates on home equity loans tend to be higher than conventional loans, and their term rates shorter.
Home equity loan:
Often called a HELOC, this loan isn’t used for a home’s primary financing, but is based on the equity in a home. Borrowers typically use HELOC for major purchases such as vacations, tuition, or home repairs or upgrades. The entire credit line may or may not be disbursed up front. Borrowers use what they need at a given time. Most HELOCS require a monthly interest-only payment. The balance may be paid back over time or as a lump sum (balloon payment) by the end of the term.
Home Equity Line of Credit
Also called a reverse annuity mortgage, this is designed for those who want to use the equity in their homes to stay in their homes. With a reverse mortgage, the lender makes payments to the homeowner for a specified period of time and gains corresponding ownership.
Reverse mortgage
