chapter four
DESCRIPTION
CHAPTER FOUR. FIXED RATE MORTGAGE LOANS. Chapter Objectives. Characteristics of constant payment (CPM), constant amortization (CAM), and graduated payment mortgages (GPM) Effective cost of borrowing v.s. lenders effective yield Calculate discount points or loan origination fees. - PowerPoint PPT PresentationTRANSCRIPT
CHAPTER FOURCHAPTER FOUR
FIXED RATE
MORTGAGE LOANS
Chapter ObjectivesChapter Objectives
• Characteristics of constant payment (CPM), constant amortization (CAM), and graduated payment mortgages (GPM)
• Effective cost of borrowing v.s. lenders effective yield
• Calculate discount points or loan origination fees
Determinants of Mortgage Determinants of Mortgage Interest RatesInterest Rates
• Real rate of interest- the required rate at which economic units save rather than consume
• Rate of inflation
• Nominal rate or constant rate i= r+f
• Nominal rate= real rate plus a premium for inflation
Determinants of Mortgage Determinants of Mortgage Interest RatesInterest Rates
• Default risk- creditworthiness of borrowers• Interest rate risk- rate change due to market
conditions and economic conditions• Prepayment risk- falling interest rates• Liquidity risk• i=r+ f+ P…
Development of Mortgage Development of Mortgage Payment PatternsPayment Patterns
• Constant amortization mortgage (CAM)
• Constant payment• Interest computed on the monthly loan
balance• Constant amortization amount• Total payment= constant amortization
amount plus monthly interest
Development of Mortgage Development of Mortgage Payment PatternsPayment Patterns
• Constant payment mortgage (CPM)• Constant monthly payment on original
loan• Fixed rate of interest for a given term• Amount of amortization varies each
month• Completely repaid over the term of the
loan
Development of Mortgage Development of Mortgage Payment PatternsPayment Patterns
• Graduated payment mortgage (GPM)
• Mortgage payments are lower in the initial years of the loan
• GPM payments are gradually increased at predetermined rates
Loan ConstantsLoan Constants
• Used prior to financial calculators
• Loan constant=
annual debt service
original loan balance
Loan Closing Costs and Loan Closing Costs and Effective Borrowing CostsEffective Borrowing Costs
• Statutory costs
• Third party charges
• Additional finance charges i.e. loan discount fees, points
Effective Interest Cost Effective Interest Cost ExamplesExamples
• Contractual loan amount $60,000
• Less organization fee(3%) $ 1,800
• Net cash disbursed by lender $58,200
• Interest rate= 12%
• Term 30 years
Effective Interest Cost Effective Interest Cost Examples ContinuedExamples Continued
• Calculator solution– n=360– PMT= -617.17– PV= 58,200– FV= 0– i=1.034324 (12.41% annualized)
Other Fixed Rate MortgagesOther Fixed Rate Mortgages
• Characteristics and Requirements:
• Regulation Z- truth in lending (APR)
• RESPA- Real Estate Settlement Procedures Act
• Prepayment penalties and other fees
• Reverse annuity mortgages (RAMs)
Reverse Annuity Reverse Annuity Mortgage ExampleMortgage Example
• Residential property value $500,000• Loan amount (to be disbursed
• in monthly installments) $250,000
• Term 10 years 120 months
• Interest Rate 10%
Reverse Annuity Reverse Annuity Mortgage Example ContinuedMortgage Example Continued
• Calculator solution:– FV=-250,000– i=10%/ 12– PMT= ?– n=120– Solve for payment $1220.44