MortgageTraining.docx

**Mortgage** Mortgage means loaning money from the lender by pledging a material asset (collateral) as the security for the amount. 1. **Example 1**: When a person pledges his gold as security and loans money against it, it is called a "Gold Loan". 2. **Example 2**: When a person pledges hi...

**Mortgage** Mortgage means loaning money from the lender by pledging a material asset (collateral) as the security for the amount. 1. **Example 1**: When a person pledges his gold as security and loans money against it, it is called a "Gold Loan". 2. **Example 2**: When a person pledges his automobile (bike, car, etc.) and loans money against it, it is called a "Vehicle Loan". 3. **Example 3**: When a person pledges his home and loans money against it, it is called a "Home Loan". In the US a "Home Loan" is called a "Mortgage".  **There are mainly three transaction types: Purchase Transactions, Refinance Transactions & Construction to Permanent.** **1. Purchase Transactions** A loan given by a bank for the purchase of a home. For Example: Raji wants to buy a house that costs \$100,000. He walks into HSBC Bank to apply for a loan, as he doesn\'t have \$100,000 with him. HSBC agrees to loan him \$80,000 after verifying his credit history, income, etc. This is considered as a loan, for the purchase of a home. **2. Refinance Transactions** Refinancing refers to the replacement of an existing mortgage (loan) with another mortgage (loan). The borrower pays off the existing mortgage with the money that he receives from the new mortgage. The borrower then starts paying EMIs to clear off his new mortgage.  A refinance could be of two types: 1. **Rate & Term Refinance:** The rate and term refinance is the most common type of refinance, wherein the original mortgage (loan) is paid off and replaced with a fresh mortgage (loan) with a new rate and set of terms. The borrower doesn't get cash, out of this type of refinance (even if he gets cash -- it cannot exceed \$2,000 or 2% of the loan amount, whichever is lesser). 2. 2 **Cash-Out Refinance:** The "Cash Out" refinance is what people, who need cash, use. They refinance the property for a higher loan amount than the existing loan balance.  For example: Raji had taken a loan of \$80,000 to purchase a house that is worth \$100,000 back in 2012. After 10 years of monthly mortgage payments, the debt has now reduced to \$60,000 (existing loan balance) from \$80,000 (initial loan balance). Hence, he now has an equity of \$40,000 on the property. If he refinances the property now, for a new loan amount of \$80,000, he will have \$20,000 in hand after paying off the existing loan balance of \$60,000. 1. **Rate & Term Refinance:** The rate and term refinance is the most common type of refinance, wherein the original mortgage (loan) is paid off and replaced with a fresh mortgage (loan) with a new rate and set of terms. The borrower doesn't get cash, out of this type of refinance (even if he gets cash -- it cannot exceed \$2,000 or 2% of the loan amount, whichever is lesser). 2. 2 **Cash-Out Refinance:** The "Cash Out" refinance is what people, who need cash, use. They refinance the property for a higher loan amount than the existing loan balance.  For example: Raji had taken a loan of \$80,000 to purchase a house that is worth \$100,000 back in 2012. After 10 years of monthly mortgage payments, the debt has now reduced to \$60,000 (existing loan balance) from \$80,000 (initial loan balance). Hence, he now has an equity of \$40,000 on the property. If he refinances the property now, for a new loan amount of \$80,000, he will have \$20,000 in hand after paying off the existing loan balance of \$60,000. **Parties involved in a Mortgage Transaction** **1. Parties in a Purchase Transaction** In a Purchase transaction, we come across four stake holders: Mortgage Broker, Borrower, Seller and lender. Kindly click on the \'+\' icons in the image below, to understand more about the \"Mortgage Broker\" and \"Borrowers\". 1. **Borrower:** A borrower is a person who needs money and pledges his property as security (collateral) to the lender for obtaining funds. 2. 2 **Mortgage Broker:** A mortgage broker is a third-party person who has tie up with multiple lenders. The borrower can choose the lender of his choice, based on the estimation received from these lenders through the broker. The borrowers usually pay a commission fee to the broker for their services. To make it more clear, we can look at mortgage brokers as similar to Amazon or Flipkart. If you want to buy a mobile, you can login to Amazon and you get a variety of brands (Samsung, Apple, Xiaomi, OnePlus, etc.) to choose from. You can also compare the features of these mobiles side by side and decide which one to buy. So, in this case, Amazon/Flipkart acts as a broker. 3. 3 **Seller:** Seller is a person who sells his property (Real Estate) to someone who is in need of home (Buyer/Borrower), for a certain price called the "Sales Price". 4. 4 **Lender:** A lender is a financial institution that provides the funds (loan amount) to the borrower with certain conditions. The conditions usually involve the following: - The borrower needs to repay the mortgage, in monthly instalments (called as \"monthly mortgage payments\") over a period of few years (called as \"loan term\").  - The payment should reach the lender by a certain date, every month. The lenders usually charge a late payment fee if the borrower doesn't make the payment on time. **Example:** 'X' is selling the property to 'Y' and 'Y' is obtaining a loan from 'A' to fund this transaction. In the above case, X - Seller; Y -- Buyer/Borrower, A -- Lender. **2. Parties in a Refinance Transaction** In a Refinance transaction, we come across three stake holders:  Borrower, existing lender and the new lender. Kindly click on the \'+\' icons in the image below, to understand more about the \"New Lender\" and \"Borrowers\". 1. **Borrower:** A borrower is a person who needs money and pledges his property as security (collateral) to the lender for obtaining funds. 2. 2 **Existing Lender:** Existing lender is the financial institution (Bank) with whom the borrower has an existing Mortgage and is paying his monthly mortgage payments. 3. 3 **New Lender: **New lender is the financial institution (Bank) who is going to provide a new loan to the borrower. The borrower will use these funds to clear off the mortgage with his existing lender. He will then start paying monthly mortgage payments, to the new lender.  **Example** John (Borrower) is making mortgage payments for the past 5 years to "Citi bank" at the interest rate of 3.5%. Freedom Mortgage approaches him offering 2.8% of interest rate. Now, John plans to close the loan on his property with Citi Bank (Existing lender) by obtaining another loan from Freedom Mortgage (New lender), as he is getting a lower interest rate. **Example** John (Borrower) is making mortgage payments for the past 5 years to "Citi bank" at the interest rate of 3.5%. Freedom Mortgage approaches him offering 2.8% of interest rate. Now, John plans to close the loan on his property with Citi Bank (Existing lender) by obtaining another loan from Freedom Mortgage (New lender), as he is getting a lower interest rate. **Example** John (Borrower) is making mortgage payments for the past 5 years to "Citi bank" at the interest rate of 3.5%. Freedom Mortgage approaches him offering 2.8% of interest rate. Now, John plans to close the loan on his property with Citi Bank (Existing lender) by obtaining another loan from Freedom Mortgage (New lender), as he is getting a lower interest rate.