Chapter 13 - Introduction to Mortgage Finance

What is included in a balloon payment?

A balloon payment includes any payment of principal over and above the regular payment.

Describe how a constant payment loan works.

A constant payment loan is a loan which is repaid by equal and consecutive instalments that include both principal and interest.

What is amortization?

Amortization is the process of paying off a loan by periodic payments of blended principal and interest.

What is the difference between an interest-only loan and interest-accruing loan?

An interest-only loan is repaid with interest-only payments until the end of the loan term, where the principal and last interest payment are owed. An interest-accruing loan requires a single lump-sum payment of principal and accumulated interest at the end of the loan term.

What is the difference between fully amortized and partially amortized mortgages?

Answer: A fully amortized mortgage is one in which the loan is completely repaid by payments made over the entire amortization period. A partially amortized mortgage is one in which the loan term is shorter than the amortization period, and an outstanding balance exists at the end of the term.

Define compound interest.

Compound interest is interest which, during the life of the loan, is charged or calculated at regular intervals and if not immediately paid (as in an interest-only loan) will, in subsequent periods, earn interest itself (as in an interest-accruing loan).

The number of times compound interest is charged or calculated per year (for example, semi-annually or monthly), is referred to as the __________ __________.

Compounding frequesncy

Describe diversification.

Diversification is the process of investing funds in more than one project or industry in order to reduce the risk of unexpected losses.

Incurring an obligation to repay a debt in order to invest or consume more than one currently owns is known as ______ ____________.

Incurring an obligation to repay a debt in order to invest or consume more than one currently owns is known as debt financing.

List the three major sources of mortgage funds.

There are three major types of lenders: institutional lenders, private lenders, and government.