chapter 4 fixed rate mortgages determinants of mortgage interest rates: –mortgage interest rates...

CHAPTER 4CHAPTER 4FIXED RATE MORTGAGESFIXED RATE MORTGAGES

DETERMINANTS OF MORTGAGE DETERMINANTS OF MORTGAGE INTEREST RATES:INTEREST RATES:– MORTGAGE INTEREST RATES ARE BASED ON MORTGAGE INTEREST RATES ARE BASED ON

A “DERIVED DEMAND” -- THE DEMAND FOR A “DERIVED DEMAND” -- THE DEMAND FOR HOUSING AND ALSO SUPPLY SIDE FACTORS.HOUSING AND ALSO SUPPLY SIDE FACTORS.

– THE MORTGAGE MARKET IS PART OF A THE MORTGAGE MARKET IS PART OF A LARGER CAPITAL MARKET - i.e., THE SUPPLY LARGER CAPITAL MARKET - i.e., THE SUPPLY OF MORTGAGE MONEY IS IN COMPETITION OF MORTGAGE MONEY IS IN COMPETITION WITH OTHER TYPE OF LOANS/INVESTMENTS WITH OTHER TYPE OF LOANS/INVESTMENTS (CAPITAL MARKETS)(CAPITAL MARKETS)

INTEREST RATESINTEREST RATES

REAL RATE OF INTEREST - MINIMUM REAL RATE OF INTEREST - MINIMUM RATE REQUIRED TO DIVERT FUNDS RATE REQUIRED TO DIVERT FUNDS FROM PRESENT CONSUMPTION TO FROM PRESENT CONSUMPTION TO FUTURE CONSUMPTIONFUTURE CONSUMPTION– USUALLY MEASURED AS A SHORT-TERM USUALLY MEASURED AS A SHORT-TERM

INTEREST RATEINTEREST RATE– A NOMINAL (CURRENT DOLLARS) RATE A NOMINAL (CURRENT DOLLARS) RATE

CORRECTED FOR ACTUAL (OR ANTICIPATED) CORRECTED FOR ACTUAL (OR ANTICIPATED) CHANGES IN INFLATION CHANGES IN INFLATION Continued Continued

INTEREST RATESINTEREST RATES

– USUALLY THOUGHT OF AS A USUALLY THOUGHT OF AS A “RISKLESS” RATE“RISKLESS” RATE

– HISTORICALLY ABOUT 3 PERCENTHISTORICALLY ABOUT 3 PERCENT

NOMINAL RATE - INFLATION RATE = NOMINAL RATE - INFLATION RATE = REAL RATEREAL RATE

NOMINAL INTEREST RATE NOMINAL INTEREST RATE (CONTRACT RATE)(CONTRACT RATE)

= i= i

= REAL INTEREST RATE= REAL INTEREST RATE

+ ANTICIPATED INFLATION PREMIUM+ ANTICIPATED INFLATION PREMIUM

+ DEFAULT RISK PREMIUM+ DEFAULT RISK PREMIUM

+ PREPAYMENT RISK PREMIUM+ PREPAYMENT RISK PREMIUM

+ LIQUIDITY RISK PREMIUM+ LIQUIDITY RISK PREMIUM

+ LEGISLATIVE RISK PREMIUM+ LEGISLATIVE RISK PREMIUM


PRICING DECISIONS BY LENDERS PRICING DECISIONS BY LENDERS ARE RENDERED COMPLEX ARE RENDERED COMPLEX BECAUSE MOST MORTGAGE LOANS BECAUSE MOST MORTGAGE LOANS ARE MADE AT FIXED INTEREST ARE MADE AT FIXED INTEREST RATES FOR LONG PERIODS OF RATES FOR LONG PERIODS OF TIME.TIME.


IF LENDERS FORMED EXPECTATIONS IF LENDERS FORMED EXPECTATIONS OF WHAT INTEREST RATES WOOULD OF WHAT INTEREST RATES WOOULD BE ON A SERIES OF ONE-YEAR BE ON A SERIES OF ONE-YEAR LOANS OVER THE MATURITY OF A LOANS OVER THE MATURITY OF A GIVEN LOAN - THEY WOULD GIVEN LOAN - THEY WOULD CALCULATE IT AS FOLLOWS:CALCULATE IT AS FOLLOWS:

(1+i(1+itt))nn = (1+i = (1+i11)(1+i)(1+i22)(1+i)(1+i33) … (1+i) … (1+inn))


EXAMPLE: IF YOU FORECASTED THE EXAMPLE: IF YOU FORECASTED THE FOLLOWING SERIES OF INTEREST FOLLOWING SERIES OF INTEREST RATES RATES

(8%, 9%, 9%, 10%, 8%)(8%, 9%, 9%, 10%, 8%)

(1+i(1+itt) = (1+.08)(1+.09)(1+.09)(1+.10)(1+.08)) = (1+.08)(1+.09)(1+.09)(1+.10)(1+.08)

= (1.5244)= (1.5244)


AND,AND,

iitt = - 1 = - 1

= - 1= - 1

= 1.087977 - 1= 1.087977 - 1

= .087977 = 8.7977%= .087977 = 8.7977%

(HP10B) 1.5244, shift, y(HP10B) 1.5244, shift, yxx, 1/5 = 0.2, = , 1/5 = 0.2, = 1.0880 and 1.0880 - 1 = .088 = 8.8%1.0880 and 1.0880 - 1 = .088 = 8.8%

ContinuedContinued

n 5244.15 5244.1


THIS IS THE CONTRACT RATE THAT THIS IS THE CONTRACT RATE THAT WOULD BE CHARGED IF THE WOULD BE CHARGED IF THE FUTURE ANTICIPATED WERE AS FUTURE ANTICIPATED WERE AS FORECASTED ABOVE.FORECASTED ABOVE.

IT IS ALSO THE COMPOUND IT IS ALSO THE COMPOUND ANNUAL RATE NECESSARY TO ANNUAL RATE NECESSARY TO GROW $1 TO $1.5244 IN 5 YEARSGROW $1 TO $1.5244 IN 5 YEARS

MORTGAGE PAYMENT PATTERNSMORTGAGE PAYMENT PATTERNS

PRIOR TO GREAT DEPRESSION:PRIOR TO GREAT DEPRESSION:– HIGH DOWN PAYMENTS (50%)HIGH DOWN PAYMENTS (50%)– SHORT MATURITY (5 YEARS)SHORT MATURITY (5 YEARS)– INTEREST ONLY LOANSINTEREST ONLY LOANS– BALLOON PAYMENTSBALLOON PAYMENTS


THEREFORE,THEREFORE,– FEW COULD AFFORD HOME FEW COULD AFFORD HOME

PURCHASEPURCHASE– SHORT MATURITY/ BALLOON SHORT MATURITY/ BALLOON

PAYMENT CREATED REPAYMENT PAYMENT CREATED REPAYMENT DANGERDANGER

– R.E. AS COLLATERAL WAS NOT R.E. AS COLLATERAL WAS NOT HIGHLY REGARDEDHIGHLY REGARDED


MID 1930’s - 1970’sMID 1930’s - 1970’s– ““NEW DEAL” PROGRAMSNEW DEAL” PROGRAMS– FHA/VA LOANS, LOW DOWN FHA/VA LOANS, LOW DOWN

PAYMENTSPAYMENTS– SELF - AMORTIZING LOANSSELF - AMORTIZING LOANS– MONTHLY PAYMENTSMONTHLY PAYMENTS

SELF - AMORTIZING LOANSSELF - AMORTIZING LOANS

AMORITIZATION - THE PROCESS OF AMORITIZATION - THE PROCESS OF LOAN REPAYMENT OVER TIMELOAN REPAYMENT OVER TIME

1. CONSTANT AMORTIZATION 1. CONSTANT AMORTIZATION MORTGAGE (CAM)MORTGAGE (CAM)

MONTHLY PAYMENT = CONSTANT MONTHLY PAYMENT = CONSTANT AMORTIZATION OF PRINCIPAL + AMORTIZATION OF PRINCIPAL + INTEREST DUE ON OUTSTATNDING INTEREST DUE ON OUTSTATNDING LOAN BALANCE (OLB)LOAN BALANCE (OLB)


EXAMPLE: $100,000 LOAN, 10% EXAMPLE: $100,000 LOAN, 10% INTEREST, 30YEARS (360 PAYMENTS)INTEREST, 30YEARS (360 PAYMENTS)

MONTH 1 PAYMENT = $100,000/360= MONTH 1 PAYMENT = $100,000/360= 277.78277.78

+100,000(.10/12)= +100,000(.10/12)= 833.33833.33

$1,111.11$1,111.11


MONTH 2 PAYMENT MONTH 2 PAYMENT

= 277.78 + ((100,000-= 277.78 + ((100,000-277.78)(.10/12)277.78)(.10/12)

= 277.78 + 827.69= 277.78 + 827.69

= $1,105.47= $1,105.47

BORROWERS DIDN’T CARE FOR BORROWERS DIDN’T CARE FOR CHANGING MONTHLY PAYMENTSCHANGING MONTHLY PAYMENTS


2. CONSTANT PAYMENT MORTGAGE (CPM)2. CONSTANT PAYMENT MORTGAGE (CPM)– MONTHLY PAYMENT IS CONSTANT OVER LIFE MONTHLY PAYMENT IS CONSTANT OVER LIFE

OF LOANOF LOAN– LOAN IS FULLY AMORTIZED AT MATURITYLOAN IS FULLY AMORTIZED AT MATURITY– PORTION OF PAYMENT THAT IS PRINCIPAL PORTION OF PAYMENT THAT IS PRINCIPAL

VERSUS INTEREST CHANGES IN EVERY VERSUS INTEREST CHANGES IN EVERY PAYMENTPAYMENT

– EASIER TO QUALIFY FOR THAN CAM BECAUSE EASIER TO QUALIFY FOR THAN CAM BECAUSE INTIAL PAYMENT IS LOWER INTIAL PAYMENT IS LOWER

– MORE INTEREST IS PAID OVER LIFE OF LOANMORE INTEREST IS PAID OVER LIFE OF LOAN


CONSTANT PAYMENT =CONSTANT PAYMENT =

ORIGINAL LOAN AMOUNTORIGINAL LOAN AMOUNT

nmmi

mi

)1(

11


WHERE: WHERE:

– i IS ANNUAL INTEREST RATEi IS ANNUAL INTEREST RATE– m IS NUMBER OF TIMES m IS NUMBER OF TIMES

COMPOUNDING OCCURS PER YEARCOMPOUNDING OCCURS PER YEAR– n IS NUMBER OF YEARS FOR LOAN n IS NUMBER OF YEARS FOR LOAN

TO MATURETO MATURE

Self-Amortizing LoansSelf-Amortizing Loans

Example:

$100,000 Loan, 10% Interest, 30 Years

Payment =

= $877.57

12.30.

)1210.

1(

11

1210.

000,100$


INSERT CHARTS AND GRAPHSINSERT CHARTS AND GRAPHS

CACULATING OUTSTANDING CACULATING OUTSTANDING LOAN BALANCES (OLB)LOAN BALANCES (OLB)

HP10BHP10B– 1. CALCULATE MORTGAGE PAYMENT1. CALCULATE MORTGAGE PAYMENT– 2. RECORD PAYMENT IN QUESTION, 2. RECORD PAYMENT IN QUESTION,

IMPUTIMPUT– 3. SHIFT, AMORT3. SHIFT, AMORT

= INTEREST EXPENSE= INTEREST EXPENSE

= PRINCIPAL REDUCTION= PRINCIPAL REDUCTION

= OLB= OLB

CACULATING OUTSTANDING CACULATING OUTSTANDING LOAN BALANCES (OLB)LOAN BALANCES (OLB)

OLB = PV OF REMAINING PAYMENTS OLB = PV OF REMAINING PAYMENTS DISCOUNTED AT CONTRACT RATEDISCOUNTED AT CONTRACT RATE

EXAMPLE:EXAMPLE:

$100,000 LOAN, 10% INTEREST, 30 $100,000 LOAN, 10% INTEREST, 30 YEARSYEARS

PMT = $877.57PMT = $877.57

OLBOLB357357 = $2,589.37 = $2,589.37 HP10BHP10B

= $2,589.43= $2,589.43 PV OF PMTS METHODPV OF PMTS METHOD

CLOSING COSTSCLOSING COSTS

EXPENSES IN ADDITION TO THE PURCHASE EXPENSES IN ADDITION TO THE PURCHASE PRICE OF THE PROPERTY WHICH MUST BE PRICE OF THE PROPERTY WHICH MUST BE PAID BY THE PURCHASER OR DEDUCTED PAID BY THE PURCHASER OR DEDUCTED FROM THE PROCEEDS OF THE SALE TO FROM THE PROCEEDS OF THE SALE TO THE SELLER AT THE TIME OF CLOSING. THE SELLER AT THE TIME OF CLOSING. THESE COSTS CAN GENERALLY BE PLACED THESE COSTS CAN GENERALLY BE PLACED IN ONE OF THREE CATEGORIES: IN ONE OF THREE CATEGORIES: STATUTORY COSTS, THIRD-PARTY STATUTORY COSTS, THIRD-PARTY CHARGES, AND ADDITIONAL FINANCE CHARGES, AND ADDITIONAL FINANCE CHARGES.CHARGES.


STATUTORY COSTS - LEGAL STATUTORY COSTS - LEGAL REQUIREMENTS PERTAINING TO REQUIREMENTS PERTAINING TO TITLE TRANSFERS, RECORDING TITLE TRANSFERS, RECORDING DEEDS, TAX STAMPS, ETC... DEEDS, TAX STAMPS, ETC... THESE COSTS SHOULD NOT BE THESE COSTS SHOULD NOT BE CONSIDERED PART OF FINANCING CONSIDERED PART OF FINANCING COSTS.COSTS.


THIRD-PARTY COSTS - ATTORNEY’S THIRD-PARTY COSTS - ATTORNEY’S FEES, APPRAISALS, SURVEYS, FEES, APPRAISALS, SURVEYS, BUILDING INSPECTION, TERMITE BUILDING INSPECTION, TERMITE INSPECTION, TITLE INSURANCE, INSPECTION, TITLE INSURANCE, BROKER COMMISSIONS. NOT TO BROKER COMMISSIONS. NOT TO BE CONSIDERED PART OF BE CONSIDERED PART OF FINANCING COSTS.FINANCING COSTS.


FINANCE COSTS (LOAN FEES) - THESE FINANCE COSTS (LOAN FEES) - THESE CHARGES CONSTITUTE ADDITIONAL CHARGES CONSTITUTE ADDITIONAL INCOME TO THE LENDER AND SHOULD INCOME TO THE LENDER AND SHOULD BE INCLUDED AS A PART OF THE COST BE INCLUDED AS A PART OF THE COST OF BORROWING. TWO TYPES: OF BORROWING. TWO TYPES: – 1. LOAN ORIGINATION FEES - THESE 1. LOAN ORIGINATION FEES - THESE

CHARGES COVER THE ADMINISTRATIVE CHARGES COVER THE ADMINISTRATIVE COSTS INCURRED BY THE LENDER AND ARE COSTS INCURRED BY THE LENDER AND ARE TYPICALLY STATED AS A PERCENTAGE OF TYPICALLY STATED AS A PERCENTAGE OF THE LOAN.THE LOAN.


– 2. LOAN DISCOUNT OR POINTS - A FEE 2. LOAN DISCOUNT OR POINTS - A FEE CHARGED BY A LENDER AT CLOSING CHARGED BY A LENDER AT CLOSING OR SETTLEMENT THAT RESULTS IN OR SETTLEMENT THAT RESULTS IN INCREASING THE LENDER’S EFFECTIVE INCREASING THE LENDER’S EFFECTIVE YIELD (IRR) ON THE MONEY LOANED. YIELD (IRR) ON THE MONEY LOANED. EACH DISCOUNT POINT REPRESENTS A EACH DISCOUNT POINT REPRESENTS A ONE-TIME CHARGE BY THE LENDER ONE-TIME CHARGE BY THE LENDER EQUAL TO 1% OF THE LOAN EQUAL TO 1% OF THE LOAN PRINCIPAL.PRINCIPAL.

EFFECTIVE YIELD EFFECTIVE YIELD (EFFECTIVE BORROWING COSTS)(EFFECTIVE BORROWING COSTS)

THE INTEREST RATE THE LENDER EARNS.THE INTEREST RATE THE LENDER EARNS. NORMALLY, THE EFFECTIVE YIELD IS THE NORMALLY, THE EFFECTIVE YIELD IS THE

SAME AS THE CONTRACT RATE OF INTEREST SAME AS THE CONTRACT RATE OF INTEREST ON WHICH THE LOAN PAYMENTS ARE ON WHICH THE LOAN PAYMENTS ARE CALCULATED.CALCULATED.

CERTAIN MODIFICATIONS TO LOANS ALTER CERTAIN MODIFICATIONS TO LOANS ALTER THE “TRUE” RATE OF INTEREST THE LENDER THE “TRUE” RATE OF INTEREST THE LENDER EARNS. THESE MODIFICATIONS ARE LOAN EARNS. THESE MODIFICATIONS ARE LOAN DISCOUNTS, LOAN ORIGINATION FEES, AND DISCOUNTS, LOAN ORIGINATION FEES, AND PREPAYMENT PENALITIES.PREPAYMENT PENALITIES.

EFFECTIVE YIELD EFFECTIVE YIELD (EFFECTIVE BORROWING COSTS)(EFFECTIVE BORROWING COSTS)

TRUTH-IN-LENDING ACT REQUIRES APR TRUTH-IN-LENDING ACT REQUIRES APR (ANNUAL PRECENTAGE RATE) WHICH (ANNUAL PRECENTAGE RATE) WHICH ACCOUNTS FOR ORIGINATION FEES ACCOUNTS FOR ORIGINATION FEES AND DISCOUNT POINTS. APR AND DISCOUNT POINTS. APR CALCULATION ALLOWS COMPARISION CALCULATION ALLOWS COMPARISION OF LOANS WITH DISSIMILAR CONTRACT OF LOANS WITH DISSIMILAR CONTRACT RATES, FEES, AND MATURITIES. RATES, FEES, AND MATURITIES. PREPAYMENT EFFECT IS NOT PREPAYMENT EFFECT IS NOT CONSIDERED IN APR CALCULATION.CONSIDERED IN APR CALCULATION.

Calculating Effective YieldCalculating Effective Yield

The basic idea:

The present value of forecasted stream

of income + PV of any reversion amount

should be equal to the disbursement

[orig. loan] when discounted at the

appropriate rate [Effective Yield/Cost].

IRR (Internal Rate of Return]

= the discount rate that caused the

PV of CFs to equal the initial cost

= The i that causes NPV = 0

Think of a loan disbursement as the lender’s investment.

The CFs equal the loan payment.

Examples:

Loan Amount $100,000

Interest Rate 8%

Maturity Term 30 years- monthly payment

Calculate monthly payment = $733.76

Calculate effective yield (YTM or IRR) = 7.99999

= 8%

What if an origination fee or discount points are charged ?

Assume same loan term as above, however 2 discount points and 1 origination point are charged .

Disbursement = $100,000

-3,000 ( .03 X 100,000)

$ 97,000

CFS = $733.76/mo.

IRR = 8.3237%

What happens when a loan is prepaid ?

1. Assume no origination fees or discount points. Loan prepaid at end of year 15 (after 180 payments)

Calculate OLB = $76,781.55

CFs Time

(100,000) 0

733.76 1

733.76 2 . . . . 733.76 + 76,781.55 180

IRR = 8%

• IRR will equal contract rate at any prepayment date if there are no orig. or discount points, and there is no prepayment penalty.

2. Assume no points, but a prepayment penalty of 3% of OLB. Loan prepaid at end of year 15.

$76,781.55

Calculate prepayment penalty = X.03

$ 2,303.45

CFs Time

(100,000) 0

733.76 1

733.76 2 . . . . 733.76 + 76,781.55+2,303.45 180

IRR = 8.0853%

3. Assume 3 points, 3% prepayment penalty. Loan prepaid at end of year 15.

IRR = 8.4628%

4. Assume same as #3, but prepayment occurs at end of year 5.

IRR = 9.2278%

• The earlier a loan is prepaid that has origination or discount points, or a prepayment penalty, the higher the effective yield.

Mortgage TiltMortgage Tilt

Tilting describes the high nominal Tilting describes the high nominal mortgage payments required in the mortgage payments required in the early life of a mortgage when interest early life of a mortgage when interest rates include a large inflation rates include a large inflation premium. Tilt results because inflation premium. Tilt results because inflation expectations are included in the expectations are included in the interest rate and therefore expense interest rate and therefore expense estimate but not in the loan estimate but not in the loan applicants’ income estimate. applicants’ income estimate.

Mortgage TiltMortgage Tilt Tilt creates on affordability problem Tilt creates on affordability problem

when traditional loan underwriting when traditional loan underwriting standards are used. Explains the standards are used. Explains the inability of home buyers to obtain inability of home buyers to obtain homes whose actual economic costs homes whose actual economic costs they could afford.they could afford.

If inflation does occur incomes and If inflation does occur incomes and home prices should rise, therefore home prices should rise, therefore most families should be able to more most families should be able to more easily cover the fixed monthly easily cover the fixed monthly mortgage payment (the payment mortgage payment (the payment becomes a smaller portion of their becomes a smaller portion of their income). income).

Effect of Inflation of Real Payment of Fixed-rate Mortgage$80,000, 30-year mortgage; $3,000/month initial income

Year Monthly Payment Real Payment Payment/Income

Case A: 0% inflation; 3% interest rate 1 $335.36 $335.36 11.18%5 335.36 335.36 11.18

10 335.36 335.36 11.1820 335.36 335.36 11.1830 335.36 335.36 11.18

Case B: 2% inflation; 5% interest rate 1 $429.45 $421.03 13.76%5 429.45 388.97 11.74

10 429.45 352.30 9.6020 429.45 289.01 6.4030 429.45 237.09 4.36

Case C: 8% inflation; 11% interest rate 1 $761.86 $705.42 23.05%5 761.86 518.51 15.65

10 761.86 352.89 9.6520 761.86 163.45 3.6730 761.86 75.71 1.39

Graduated Payment Mortgage Graduated Payment Mortgage (GPM)(GPM)

Another approach to the inflation problem. Lower initial payments than on CPMs with same i & n. Payments stabilize after 5-10 years of gradual increases.• Combats Tilt Effect• Makes initial qualifying easier

What about GPMs in non inflationary periods ? Yes for homebuyers who have careers that offer future (substantial) wage increases.

Because GPM payments are lower than those of comparable CPMs in the early years, GPM payments must eventually exceed the level payments of CPMs to “catch up”.

OLBS - Since early year GPM payments are lower than similar GPM payments - not enough is being repaid to meet full principle + interest expense required to amortize the loan. Therefore, negative amortization will occur.

Higher OLBs are not good for lenders - it reduces their “Safety margin”; LTV goes up. Therefore, GPMs is riskier than CPMs. Lenders probably would /should charge slightly higher nominal rates on GPMS.

What is a reverse mortgage What is a reverse mortgage loan? loan?

A reverse mortgage is a special type of loan A reverse mortgage is a special type of loan available only to older homeowners with full available only to older homeowners with full or nearly full equity in their homes. Such or nearly full equity in their homes. Such owners can borrow against the equity they owners can borrow against the equity they have built up over the years, but no have built up over the years, but no repayment is necessary until the borrower repayment is necessary until the borrower sells the property or moves elsewhere. If the sells the property or moves elsewhere. If the borrower dies before the property is sold, borrower dies before the property is sold, the estate repays the loan (plus any interest the estate repays the loan (plus any interest that has accrued that has accrued

Common Features of Reverse Common Features of Reverse Mortgages Mortgages

RMs are rising-debt loans. This means that the RMs are rising-debt loans. This means that the interest is added to the principal loan balance each interest is added to the principal loan balance each month, because it is not paid on a current basis. month, because it is not paid on a current basis. Therefore, the total amount of interest you owe Therefore, the total amount of interest you owe increases significantly with time as the interest increases significantly with time as the interest compounds. compounds.

All three plans (All three plans (FHA-insured,FHA-insured, lender-insured,lender-insured, and and uninsureduninsured) charge origination fees and closing costs. ) charge origination fees and closing costs. Insured plans also charge insurance premiums, and Insured plans also charge insurance premiums, and some impose mortgage servicing charges. Your some impose mortgage servicing charges. Your lender may permit you to finance these costs so you lender may permit you to finance these costs so you will not have to pay for them in cash. But remember will not have to pay for them in cash. But remember these costs will be added to your loan amount these costs will be added to your loan amount

http://library.hsh.com/?row_id=162#fhains

http://library.hsh.com/?row_id=162#lenins

http://library.hsh.com/?row_id=162#unins

Common Features of Reverse Common Features of Reverse MortgagesMortgages

RMs use up some or all of the equity in your RMs use up some or all of the equity in your home, leaving fewer assets for you and your home, leaving fewer assets for you and your heirs in the future. heirs in the future.

You generally can request a loan advance at You generally can request a loan advance at closing that is substantially larger than the closing that is substantially larger than the rest of your payments. rest of your payments.

Your legal obligation to pay back the loan is Your legal obligation to pay back the loan is limited by the value of your home at the limited by the value of your home at the time the loan is repaid. This could include time the loan is repaid. This could include increases in the value (appreciation) of your increases in the value (appreciation) of your home after your loan begins. home after your loan begins.

Common Features of Reverse Common Features of Reverse MortgagesMortgages

RM loan advances are nontaxable. Further, they do RM loan advances are nontaxable. Further, they do not affect your Social Security or Medicare benefits. not affect your Social Security or Medicare benefits. If you receive Supplemental Security Income, RM If you receive Supplemental Security Income, RM advances do not affect your benefits as long as you advances do not affect your benefits as long as you spend them within the month you receive them. spend them within the month you receive them. This is true in most states for Medicaid benefits also. This is true in most states for Medicaid benefits also. When in doubt, check with a benefits specialist at When in doubt, check with a benefits specialist at your local area agency on aging or legal services your local area agency on aging or legal services office .office .

Some plans provide for fixed rate interest. Others Some plans provide for fixed rate interest. Others involve adjustable rates that change over the loan involve adjustable rates that change over the loan term based upon market conditions .term based upon market conditions .

Interest on RMs is not deductible for income tax Interest on RMs is not deductible for income tax purposes until you pay off all or part of your total RM purposes until you pay off all or part of your total RM debt. debt.

chapter 4 fixed rate mortgages determinants of mortgage interest rates: –mortgage interest rates...

Documents

rate contract rate example

real rate slide

minimum rate

riskless rate

rates real rate

mortgage loans

n slide

nominal current dollars