Types of Mortgage Loans Flashcards
Fixed rate mortgage
Mortgage time (time period) and interest rate are fixed, so payment stays the same
compute PMT
Are interest rates higher or lower on longer mortgages?
Higher, because a longer period is more risky
Balloon note (portfolio)
Mortgage payments cover a short period of time, so less interest rate risk
Why does the buyer want a balloon note, and who makes them?
Couldn’t qualify for mortgage
Commercial mortgage
Expect rates to go down
Living somewhere short term
-By bank, mortgage lending branch
How are balloon notes amortized?
Interest rate is readjusted after the short time period is over (so higher)
ex. 3 year- balloon due at 36th payment
Construction loan
Building your own house/building
Mortgage covers fixed short period
compute FV
Construction loan payoff options
Pay interest in full at the end
Pay interest monthly over term
Interest added to loan at the end of construction, while converting loan to a permanent mortgage
What is a takeout commitment involved in the construction loan process, and who makes them?
A letter saying the mortgage company will provide long term financing to replace the bank’s short term
-Made by commercial banks
How is the loan money given to the borrower for a construction loan?
In stages (draws):
Foundation
Framing
Turn key/final
What is an adjustable rate mortgage? (ARM)
A mortgage that covers a fixed period
Interest is variable and attached to an index over the term
Payment changes every time interest rate adjusts
How often do interest rates change in an ARM?
Yearly
Why would a borrower and a lender want an ARM?
Borrower- expect rates to go down, living somewhere short term, have no choice
Lender- no interest risk
Hybrid ARM
“3/1 hybrid” - 3 years fixed rate, adjustable after that
To start, does an ARM or an FRM have a lower interest rate?
ARM
ARM terms
Teaser rate Index Margin Annual rate cap/periodic cap Lifetime cap/overall cap
