Chapter 2: Types of Mortgages

advantages of FHA loans

1. Borrowers who don't qualify for a conventional loan might be able to qualify for an FHA loan. 2. Mortgages can be made on a graduated payment schedule, with low monthly payments that increase over time. 3. FHA-insured loans are not allowed to carry a prepayment penalty. 4. FHA loans can be assumed by other borrowers.

disadvantages of fixed-rate mortgages

1. If the interest rate is high when the borrower is trying to get a mortgage, their interest rate will stay high for the life of the loan. The only way they would be able to change their interest rate is to refinance, which can be helpful, but can also be a hassle. 2. If the interest rate drops by a lot, the borrower won't be able to take advantage of the drop. Again, their only option would be to refinance. 3. A lot of the time, fixed-rate mortgages are sold to the secondary market, while ARMs stay within the lender's institution. This means that ARMs can usually be more customizable than fixed-rate.

stages of ARMs

1. Initial Rate Period: The introductory period of an adjustable-rate mortgage loan in which the interest rate is locked at the initial rate 2. Adjustment Period: Set periods of time in which the ARM loan's interest rate can be adjusted 3. Lookback Period: The date when the index rate for the upcoming adjustment period is selected

disadvantages of adjustable-rate mortgages

1. Interest is constantly in flux. If interest rates go way up, the borrower will end up paying way more than they began paying in the introductory interest period. 2. The borrower will have to be careful because sometimes the rate caps don't apply to the first adjustment. Yikes! This is something they'll definitely want to discuss/negotiate with their lender. 3. If a borrower isn't super knowledgeable about ARMs, they might have trouble negotiating with the lender because there's so much that goes into them. Lenders might use the borrower's lack of knowledge to sign them up for something that isn't very beneficial to them.

advantages of balloon mortgages

1. It typically has an interest rate that is 0.25% to 0.5% less than comparable fixed-rate mortgages. 2. Those who plan to sell their homes after five or seven years are in an excellent position to take advantage of this rate reduction. It could also work out to a buyer's advantage if they plan to refinance before the loan term is up. 3. The lower rate gives borrowers increased purchasing power because their housing expense is lower and they qualify for larger loans.

advantages of adjustable-rate mortgages

1. The big draw toward ARMs is the fact that they offer introductory interest rates that will be lower than fixed interest rates. 2. If interest rates are dropping, ARM borrowers will be able to reap the benefits without doing anything. They won't have to refinance to take advantage of lower interest rates. 3. If the borrower doesn't intend to stay in the house long, they'll be able to take advantage of cheap interest before selling their house. If they sell before the adjustment, they won't have to worry about a payment increase.

advantages of fixed-rate mortgages

1. The payments are always going to be the same. 2. Because of the stability, they'll be able to create a monthly budget and not have to worry about it changing because of the house payment.

What is the minimum down payment for an FHA loan?

3.5%

An ARM has an index rate of 3.5% and the margin is 1.5%. What is the fully-indexed interest rate? A. 5% B. 8.5% C. 3.5% D. 17.25%

A. 5% The fully-indexed interest rate is the index rate and the margin combined.

mortgage insurance premium (MIP)

All FHA loan borrowers are required to pay a 1.75% MIP. These MIPs are how the FHA program is funded — no taxpayer money is used whatsoever. The funds from these premiums are stored in an account and used to fund the entire FHA operation. This is another reason that the program is so popular — it remains relatively unaffected by day-to-day politics. The upfront MIP can be financed into the mortgage, but the borrower will still be responsible for paying the monthly premium.

funding fee

All VA loans require a funding fee, which is different from the lender's origination fee. Unlike the origination fee, the funding fee can be financed into the loan amount. These fees go to pay for the cost of the VA loan guarantee program.

Which of the following is NOT TRUE about fixed-rate mortgages? A. Borrowers will be unaffected by interest rate changes in the market. B. Refinancing is not allowed for fixed-rate mortgages. C. The amount of interest paid monthly diminishes throughout the term of the loan. D. They are less risky than adjustable-rate mortgages.

B. Borrowers could refinance in a few years if the interest rates are scheduled to go down.

Cammy takes out a fully-amortized, fixed-rate loan for her new vacation home on Lake Placid. When Cammy's mother asks her to fly to Singapore for their family vacation, Cammy tells her mother she doesn't know if she can afford it, as her loan payments could fluctuate. Analyze if Cammy is correct. A. Cammy IS correct; her loan payments could change at any time. B. Cammy is NOT correct; she has a fully-amortized, fixed-rate loan, so she knows exactly how much her monthly payments will be. C. Cammy is NOT correct; her loan payments may fluctuate, but they will not exceed a specified amount. D. Cammy IS correct; her loan payments will increase every month.

B. Cammy has a fully-amortized, fixed-rate loan, so she knows exactly how much her loan payments will be every month.

Who may assume a VA loan (as long as they're qualified)? A. an investor B. All choices are correct. C. a non-veteran D. a veteran

B. All choices are correct. Anyone may assume a VA loan as long as they meet the qualifications. They do not need to be a veteran.

A $200,000 conventional loan can be a: A. FHA loan B. conforming loan C. jumbo loan D. government insured loan

B. conforming loan Since $200,000 is well under the conventional loan limits, this loan can be conforming. Conventional loans that exceed the GSE loan limits are called jumbo loans.

Who issues a wraparound mortgage? A. the government B. the seller C. the buyer D. the lender

B. the seller

The guidelines that determine if a conventional loan is conforming or non-conforming are set by: A. Freddie Mac AND Ginnie Mae B. The Mortgage Association C. Fannie Mae AND Freddie Mac D. Fannie Mae AND Farmer Mac

C. Fannie Mae AND Freddie Mac Conventional conforming loans are loans that conform to the guidelines set by Fannie Mae and Freddie Mac and thus can be sold on the secondary market to Fannie Mae and Freddie Mac.

FHA ____________ loans for qualified U.S citizens and naturalized residents. A. processes B. funds C. insures D. sells

C. insures FHA does not provide the money for FHA loans. The money comes from a primary lender. Banks, credit unions, and mortgage companies all make FHA loans. FHA provides insurance.

The FHA program is funded solely by: A. taxpayer money B. mortgage interest premiums C. mortgage insurance premiums D. government funding

C. mortgage insurance premiums

If a buyer purchased a property for $350,000 with a loan for 100% of the purchase price, which type of loan did they most likely use? A. USDA B. conventional C. FHA D. VA

D. VA

Which type of conventional loans conform to the guidelines set by Fannie Mae and Freddie Mac and thus can be sold on the secondary market? A. non-conforming loans B. essential loans C. usury loans D. conforming loans

D. conforming loans Conventional conforming loans are loans that conform to the guidelines set by Fannie Mae and Freddie Mac and thus can be sold to them on the secondary market.

determining which loan is most beneficial to client

What is the current interest rate, based on the Fed? If it's high, an ARM could be beneficial to the borrower. If it's low and about to be on its way up, a fixed-rate will probably save them more money overall if they lock into the low rate. Do they plan on staying in their house long? If not, they should take advantage of the introductory low interest rates of ARMs. Then they can get out of there before the rate increases, all while saving up for another home because of the low payments. If the rates for the ARM do increase, would the borrower still be able to afford the payments? Maybe their introductory payment would be at the top of their budget. If so, they should avoid ARMs and go for the fixed-rate. When looking at ARMs, they should check to see how often they adjust. Some will adjust yearly, while others will adjust as much as monthly. If they'd rather have more stability, they should stick with a fixed-rate.

reverse annuity mortgage

a financial arrangement where a homeowner pledges equity to a lender in exchange for periodic payments of the pledged equity; essentially selling off equity in their home in exchange for monthly payments

sale-and-leaseback

a financing method in which an owner sells their property to an investor, who then leases the property back to the original owner, freeing up capital for the lessee usually helpful for business owners and commercial properties

graduated-payment mortgage (GPM) (gradual mortgage)

a fixed-rate mortgage that has a lower initial interest rate in its first years, but includes gradual increases each year Payments usually increase anywhere between 7.5% and 12.5% annually until reaching a fixed amount that continues for the rest of the term.

shared equity mortgage

a loan in which an investor (often times a family member) contributes to a buyer's financing in exchange for a share of the profit from a property's eventual sale there is risk involved for the lender, as a property might sell for less than it was bought for

home equity loan

a loan in which funds are borrowed using the homeowner's equity for collateral; the funds can be used for any purpose Equity loans are often limited to 80% of the value of the property. For example, if a home is worth $215,000, the maximum amount the owner can take out in loans is $172,000. If there is already a mortgage on the house that will take $50,000 to pay off, the owner will be able to get no more than $122,000 in a cash-out equity loan.

straight mortgage

a loan that is fully due on a specific date; whose periodic payments often are not sufficient to pay off the loan in time, resulting in a large lump sum payment

conventional mortgage

a loan that is not insured or guaranteed by a government entity

pledged account mortgage

a mortgage loan program in which the lendee sets up a savings account; the lender withdraws money from the account each month to be applied towards the monthly payment; the interest earned is used to subsidize the mortgage's interest

adjustable rate mortgage (ARM)

a mortgage with an interest rate that can be adjusted based on fluctuations in the cost of money often based on market index

State of New York Mortgage Agency (SONYMA)

a state agency to help low- and moderate-income buyers in New York State

construction mortgage

a temporary mortgage used to finance a construction project

balloon mortgage

a type of loan that is paid off in small, periodic payments, but at the end of which the remaining balance is due as a lump sum short-term loan (5-7 years) but has payments like a long-term loan (~30 years) At the end of the loan's term, the often-large remaining balance of the mortgage is due as a lump sum (a balloon payment). At this time, the borrower can refinance this amount (if they qualify). Some balloon mortgages have a conversion option that allows the borrower to convert the remaining balance to a 25- or 23-year fixed-rate mortgage, based upon the term of the balloon mortgage. The conversion option usually provides for a rate slightly higher than that of fixed-rate mortgages.

wraparound mortgage

an arrangement in which the seller of a property extends a mortgage to a buyer; the seller maintains their original loan and continues to pay it while also receiving mortgage payments from the buyer ** the seller must have an existing mortgage first, for it to be considered wraparound This is called a wraparound mortgage because usually the seller has a mortgage on the property that they keep, paid off with the monthly payments received from the buyer. For this reason, the seller usually charges a higher interest rate than that of the mortgage they hold. Nevertheless, this rate can be lower than the current market rate, making it appealing to buyers. Buyers also receive the advantages of no qualifying process and few closing costs. For example, there is no lender's origination fee, appraisal fee, or credit report fee, but there may be legal fees and homeowner's fees.

package mortgage

includes not only the real estate but also all personal property and appliances installed on the premises

payment cap (ARMs)

limit the amount of the monthly loan payment for the borrower, which is stated in dollars and not in percentage points

periodic rate cap (ARMs)

limits the change in interest year over year

bridge loan (swing loan)

short-term loan used to transition from one loan to another; can connect borrower from construction loan to eventual mortgage loan (or current home to their new home) The bridge loan may not require a payment for the first few months, giving the borrower time to sell their present home and avoid a property sale contingency on the offer they place on the new home.

FHA definition of first-time home buyer

someone who has never owned a home before or who has not owned a home for at least the last three years for couples, if one spouse is a homeowner but the other spouse has never owned before, then, according to the FHA, both spouses are considered first-time homebuyers when purchasing a home together

purchase-money mortgage

the buyer borrows from the seller in addition to the lender This is sometimes done when a buyer cannot qualify for a bank loan for the full amount, so the seller "takes back" a portion of the purchase price as a second mortgage.

margin (spread)

the difference between the interest rate of an ARM loan and the index value a fixed amount above the index which the borrower will pay This is given as a percentage to be added on top of the index. For example, if the spread on a loan is 3%, then the borrower is always paying 3% above whatever the index is at the last adjustment. The rate you get when you add the index and the spread is the fully-indexed rate. ** Remember that while the index may move up and down, the margin is fixed. ex: If the margin is 3% and the index rate is 5%, the interest rate will be 8%. If the index rate goes down to 3% at the next index reset period, the interest rate on the mortgage will be 6% (margin + index). When these two, the margin and the index, are combined, this is called the fully indexed interest rate.

lifetime cap/ceiling (ARMs)

the limits in which an adjustable or variable rate mortgage can increase in payment over the lifetime of a loan