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Questions and Answers
The loan term is how long the borrower has to pay off the loan.
The loan term is how long the borrower has to pay off the loan.
True (A)
Partially amortized loans are the most common type of home purchase loans.
Partially amortized loans are the most common type of home purchase loans.
False (B)
A balloon payment reduces the principal balance of a loan.
A balloon payment reduces the principal balance of a loan.
False (B)
A loan-to-value rate is the ratio of the loan amount to the property's value.
A loan-to-value rate is the ratio of the loan amount to the property's value.
Adjustable-rate mortgages were designed to address rapidly decreasing interest rates.
Adjustable-rate mortgages were designed to address rapidly decreasing interest rates.
A lower loan-to-value (LTV) ratio typically implies a:
A lower loan-to-value (LTV) ratio typically implies a:
What is 'payment shock' in the context of an adjustable-rate mortgage?
What is 'payment shock' in the context of an adjustable-rate mortgage?
What is the purpose of the index in an adjustable-rate mortgage (ARM)?
What is the purpose of the index in an adjustable-rate mortgage (ARM)?
What does the margin on an adjustable-rate mortgage (ARM) represent?
What does the margin on an adjustable-rate mortgage (ARM) represent?
What does the 'rate adjustment period' dictate in an adjustable-rate mortgage (ARM)?
What does the 'rate adjustment period' dictate in an adjustable-rate mortgage (ARM)?
What occurs in a situation of 'negative amortization'?
What occurs in a situation of 'negative amortization'?
What is the purpose of a conversion option in an adjustable-rate mortgage (ARM)?
What is the purpose of a conversion option in an adjustable-rate mortgage (ARM)?
What is the primary purpose of a negative amortization cap?
What is the primary purpose of a negative amortization cap?
The Mitchells have a 30-year adjustable-rate mortgage (ARM) with an initial rate adjustment period of seven years, followed by annual adjustments. What type of ARM do they have?
The Mitchells have a 30-year adjustable-rate mortgage (ARM) with an initial rate adjustment period of seven years, followed by annual adjustments. What type of ARM do they have?
Of the following loan repayment periods, which would result in the least amount of total interest paid?
Of the following loan repayment periods, which would result in the least amount of total interest paid?
Which loan type is described as a compromise between a 15-year and 30-year loan?
Which loan type is described as a compromise between a 15-year and 30-year loan?
In areas with high housing costs, which loan term is often used to reduce monthly payments for buyers?
In areas with high housing costs, which loan term is often used to reduce monthly payments for buyers?
A higher loan-to-value (LTV) ratio generally indicates what?
A higher loan-to-value (LTV) ratio generally indicates what?
What does a lender's maximum LTV primarily determine in a real estate transaction?
What does a lender's maximum LTV primarily determine in a real estate transaction?
What is the primary role of mortgage insurance or loan guaranties?
What is the primary role of mortgage insurance or loan guaranties?
Flashcards
Amortized Loan
Amortized Loan
A loan where the payments cover both the principal and the interest, gradually reducing the loan amount over time.
Repayment Period
Repayment Period
The total time a borrower has to repay a loan. Usually expressed in years.
Loan-to-Value Ratio (LTV)
Loan-to-Value Ratio (LTV)
The ratio calculated by dividing the loan amount by the property's value. A higher LTV signifies a larger loan relative to the property's value.
Mortgage Insurance
Mortgage Insurance
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Adjustable-Rate Mortgage (ARM)
Adjustable-Rate Mortgage (ARM)
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Rate adjustment period
Rate adjustment period
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Margin (ARM)
Margin (ARM)
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Payment cap
Payment cap
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Conversion option (ARM)
Conversion option (ARM)
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Negative amortization (ARM)
Negative amortization (ARM)
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Payment Shock
Payment Shock
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Negative Amortization
Negative Amortization
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Conversion Option
Conversion Option
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7/1 ARM
7/1 ARM
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Partially Amortized Loan
Partially Amortized Loan
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Interest Rate Cap
Interest Rate Cap
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Loan Repayment Period
Loan Repayment Period
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Maximum LTV
Maximum LTV
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Fully Amortized Loan
Fully Amortized Loan
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Interest-Only Loan
Interest-Only Loan
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Study Notes
Learning Objectives
- Students should be able to identify basic mortgage loan features, including amortization, repayment period, loan-to-value ratio, mortgage insurance, and fixed/adjustable rates.
- They should understand how different amortization methods and balloon payments work.
- Students should be able to explain the relationship between loan repayment period and interest rate, calculate loan-to-value ratios, and explain the purpose of mortgage insurance/guarantees.
- They should understand restrictions on secondary financing and the issues adjustable-rate mortgages address.
- Students should be able to list adjustable-rate mortgage features, including those for controlling interest rate/payment adjustments, and recognize circumstances leading to negative amortization.
Suggested Lesson Plan
- Review the previous chapter, "Finance Instruments," using Exercise 6.1.
- Briefly overview Chapter 6, "Basic Features of a Residential Loan," and review chapter learning objectives.
Present Lesson Content
- Amortization: (Exercise 6.2)
- Fully amortized loans repay principal and interest within the loan term without a balloon payment.
- Partially amortized loans require a balloon payment at the end of the term.
- Interest portion of payment decreases over the term, while the principal portion increases.
- Repayment Period: (Exercise 6.2)
- The repayment period, or loan term, determines how long the borrower repays the loan.
- Common terms include 15, 20, and 30 years.
- Total interest paid is significantly higher with 30-year loans than 15-year loans with the same principal loan amount. Shorter terms (15 or 20 years) typically have lower interest rates but higher monthly payments.
- Loan-to-Value Ratio (LTV):
- The LTV reflects the relationship between the loan amount and the home's value.
- A lower LTV is less risky for the lender.
- Mortgage Insurance or Loan Guaranty:
- Protects the lender in case of borrower default.
- Used with conventional, FHA, and VA loans; in a loan guaranty, a guarantor takes on secondary responsibility for the borrower's obligation.
- Secondary Financing:
- Used to cover down payments or closing costs.
- Lenders may restrict secondary financing to lower default risk.
- Fixed vs. Adjustable Interest Rates:
- Fixed-rate mortgages maintain the same interest rate throughout the loan.
- Adjustable-rate mortgages (ARMs) allow interest rate adjustments tied to an index and margin based on specific periods.
- Rate adjustments impact the monthly payment amount.
- Adjustable-Rate Mortgages (ARMs):
- ARMs offer lower initial rates than fixed-rate mortgages.
- Features include: note rate, index, margin, rate adjustment period, payment adjustment period, lookback period, interest rate cap, mortgage payment cap, and negative amortization
- Payment shock can occur when interest rates rise significantly
Chapter 6 Outline
- Amortization: Amoritized loans have regular payments for principal and interest.
- Repayment Period: Length of loan repayment period also called the loan term.
- A 30-year loan has lower monthly payments but higher total interest. A 15-year loan has higher monthly payments but lower total interest over the life of the loan.
- Loan-to-Value Ratio (LTV): Relationship between loan amount and home value. Lower LTVs are less risky to lenders.
- Mortgage Insurance/Loan Guaranty: Protects the lender against losses.
- Secondary Financing: Additional loans used to cover part of the transaction costs.
Exercises
- Ensure students understand concepts from Chapter 5, "Finance Instruments" (primary types of real property security instruments, parties to a mortgage and deed of trust, type of security instrument typically foreclosed non-judicially, purpose of an alienation clause.)
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Description
Explore the fundamental aspects of mortgage loans as outlined in Chapter 6. This quiz covers key topics such as amortization, repayment periods, loan-to-value ratios, and more. Test your understanding of fixed and adjustable rates, mortgage insurance, and loan features.
