Post-License Ch11 Summary Notes

Fixed-Rate Mortgages

The due-on-sale clause works in favor of buyers, because the prime rate is still very low.

A Graduated Payment Mortgage (GPM) should only be considered by borrowers who are certain their income is going to steadily increase over the next few years, and who don’t intend to sell the house for five to ten years.

30-  year Fixed Mortgages

  • If interest rates decline, the interest rate on the 30-year fixed will stay the same.
  • It takes longer to build equity in the home.

15-  year Fixed Mortgages

  • The borrower pays significantly less interest.
  • Equity in the home is built up much more quickly.
  • Refinancing may become necessary if the borrower experiences a drop in income.

Bi-weekly Mortgages

  • The savings in interest payments is significant.
  • The interest rate is going to be similar to a 30-year.
  • Least advantageous for borrowers whose bank balances fluctuate a lot.

Simple-interest Mortgages

  • With a simple-interest mortgage, the interest is calculated daily.
  • The only time a borrower benefits from a simple-interest mortgage is when he makes his payments early.

Interest-only Mortgages

  • It’s an option that can be attached to a mortgage.
  • It will cost the borrower m When the interest-only period is over, the payment amount often increases dramatically.
  • Works for someone whose income will increase in the next few years or someone who wants to flip a house.

Balloon Loans

  • The full balance is typically due in five to ten years.
  • The balloon has to be refinanced at current market rates
  • If the borrower has trouble making payments on time, the refinanced loan might have a higher interest rate.

Wrap-around mortgages aren’t technically loans and aren’t very common anymore. Typically, the seller is the one lending money.

Adjustable-rate Mortgage (ARM)

  • Many lenders offer introductory rates that are below the standard market rate.
  • Lenders have caps on how much the rate can increase.

Adjustable rates are typically based on one of four different indexes:

  1. COFI – 11th District Cost Of Funds Index;
  2. LIBOR – London Inter-Bank Offer Rate;
  3. PRIME;
  4. MTA – Monthly Treasury Bill Average.

Important factors they want to take into consideration:

· The Margin

  • Additional Fees
  • Rate Caps
  • Negative Amortization
  • The Payment Amount After the Rate Adjustment

ARMs are good for people who don’t plan to be in their homes for more than a few years. However, the borrower doesn’t always know what his payment is going to be.

Option Adjustable-Rate Mortgages

  • After the first month, the loan rate increases to match the current index plus its margin.
  • There are only two situations that allow a lender to make a payment increase greater than the specified percentage: when the loan reaches its maximum allowed negative amortization, or when it is recast.

Federal Housing Administration Insured ARMs

  • For single-family houses, 1-4 family units, townhouses and condos.
  • The first adjustment must occur sometime between the 12th and 18th month of the loan.
  • The index used to calculate rate increases for an FHA ARM is the One-Year Treasury Bill. Benefits to an FHA ARM:
  • The interest rate can only increase by 1% during each adjustment period.
  • The interest rate can only increase by a total of 5% for the life of the loan.
  • Negative Amortization isn’t allowed.

Consumer Protection Laws

  • Truth-in-Lending laws require disclosure of not just the interest rate for a mortgage, but total cost of the mortgage including all fees.
  • There is a booklet titled Consumer Handbook on Adjustable Rate Mortgages that was developed as an aide for potential borrowers.
  • The Equal Credit Opportunity Act protects you from being discriminated against by lenders and other financial institutions.
Post-License Ch11 Summary Notes

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