Level 13: Types of Mortgages and Sources of Financing
Barry took out a $400,000 30-year mortgage. After 30 years, Barry paid a total of $730,000 to the lender. How much did Barry pay in interest over the life of the loan?
$330,000
Why are balloon payment mortgages appealing?
1. interest rate = 0.25%-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 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.
An ARM's margin is 2% and the current index rate is 6%. The interest rate will be:
8%
Which of these is an example of securitization?
A group of loans is packaged by a lender to be sold to an investor.
When a secondary mortgage market agency buys a loan from a lender, they will do one of two things with the loan.
Hold onto the mortgages for their portfolio, in turn receiving the funds from mortgage payments Package groups of mortgages to create mortgage-backed securities (MBSs), which are then sold to investors
Which loans are given in which funds are borrowed using the homeowner's equity for collateral?
Home equity loan
Fixed-rate mortgages are bad in a few ways:
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. 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. 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.
What is the Federal Housing Administration in charge of?
Increasing homeownership Facilitating the financing of home sales and home repairs Contributing to building healthy neighborhoods and communities
What is the rate the borrower pays the lender in exchange for the money lent?
Interest
Why is it good for a borrower to make larger mortgage payments if they can?
It will decrease the amount of money they pay in interest.
How long are FHA-guaranteed loans?
Lenders offer 15 or 30 years
What's the purpose of government-sponsored enterprises (GSEs)?
GSEs work to increase mortgage availability and keep interest rates low. They act as financial intermediaries?
Government National Mortgage Association
Ginnie Mae
Which is the least responsible for what happens if someone is delinquent on their house payments?
Ginnie Mae
not a GSE
Ginnie Mae
How does Ginnie Mae differ from Fannie Mae and Freddie Mac?
Ginnie is backed by the US government
What is intermediation?
Middle man in the transaction
What is the insurance that protects the lender that is provided by the Federal Housing Agency (FHA)?
Mortgage Insurance Premium
What investment instruments have mortgages as collateral?
Mortgage-backed securities
What is called If a borrower's payments are not large enough to cover the interest due on a loan, the unpaid interest is added to the principal balance?
Negative amortization
Does the FHA set interest rates for these loans?
No, interest rates are negotiated between the borrower and lender.
Does the FHA originate or fund loans?
No, they only INSURE them.
What loans do not follow Fannie Mae and Freddie Mac guidelines and, thus, will not be purchased by Fannie and Freddie on the secondary market?
Non-conforming loans
What mortgage loans includes equal payments going towards the principal and interest, the loan will not fully be paid off with the last scheduled payment?
Partially amortized loans
Are balloon-payment mortgages fully amortizing or partially amortizing?
Partially amortizing
What is the remaining amount of the monthly payment goes towards the borrower's remaining principal?
Principal
What can a borrower who can only make a smaller down payment do?
Purchase private mortgage insurance (PMI)
What is loan given by a seller called?
Purchase-money mortgage
What did Congress create to build confidence in the economy in 1932?
Reconstruction Finance Corporation (RFC)
Which loans are granted to people over the age of 62?
Reverse annuity mortgages (RAM)
Roberta took out an interest-only loan on her house. After 5 years, she needs to sell her house, but the property value has plummeted. Which of these describes Roberta's situation?
Roberta will owe more money on the balloon payment than she will be able to get from the sale of the house.
What is the act of pooling together debt to be sold to investors?
Securitizations
Since Ginnie Mae is not a GSE, what are they considered?
State-owned enterprise (SOE)
Terry takes out a balloon-payment mortgage of $300,000. Which of these most likely describes his loan?
Terry will make low payments for a short term (7 years), after which a balloon payment is due.
What is the Federal Housing Administration (FHA) a part of?
The United States Department of Housing and Urban Development (HUD)
Adjustable Rate Mortgage (ARM) advantages:
The big draw toward ARMs is the fact that they offer introductory interest rates that will be lower than fixed interest rates. If interest rates are dropping, ARM borrowers don't have to refinance to take advantage of lower interest rates. If the borrower is able to sell before the adjustment, they won't have to worry about a payment increase.
Which of these explains why the amount of money that goes towards interest decreases after each payment?
because the interest payments are always based on the current principal balance
Commercial banks are notable for:
being the largest source of investment funds in the United States
What loans conform to the guidelines set by Fannie Mae and Freddie Mac and, thus, can be sold on the secondary market to government-sponsored enterprises (GSEs)?
conforming loans
Which of these loans is typically seen as a higher risk for lenders? government-backed loans conventional loans
conventional loans
Over the course of an amortized loan's life, the borrower's payments will increasingly be allocated towards interest payments.
false, it will allocated towards principal
The mission is to provide a secondary market for agricultural real estate mortgage loans, rural housing mortgage loans, and rural utility cooperative loans.
farmer mac
deals with smaller "thrift" banks
freddie mac
What does the FHA 203(b) program do?
insures fixed-interest-rate loans for owner-occupied, one- to four-family properties.
What is fully-amortized, fixed-rate loans? Aka level-payment-plan mortgage
the interest rate remains the same for the life of the loan and the monthly payments remain the same
John works for a company that offers loans from different lenders. John gets paid a commission for bringing lenders and borrowers together. Who will fund the loans John gets approved?
the lender John places the loan with
What mortgage loans include equal monthly payments that contribute to both principal and interest until the entire loan is paid?
Fully amortized loans
Jeremy took out a 5/1 ARM. What does the 5 mean?
the interest rate is fixed for 5 years
Adjustable Rate Mortgage (ARM) disadvantages:
ARMs are less predictable than fixed-rate loans. Interest rates change. If interest rates go way up, the borrower will end up paying way more than they began paying in the introductory interest period. The borrower might not be able to afford higher payments, and they could default on their loan. 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. If a borrower isn't super knowledgable 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.
Which loan has an interest rate than increase and decrease periodically throughout the life of the loan, often based on a market index?
Adjustable-rate mortgage (ARM)
What do lenders look at when considering approving a loan?
Appraisal and buyer's credit report
What is the larger payment called at the end of a partially amortized loan?
Balloon payment
What is the interest-only loan for periodic payments of interest?
Balloon payment loan
What 2 main activities do secondary market agencies engage in?
Buying loans Issuing mortgage-backed securities
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.
Cammy is NOT correct; she has a fully-amortized, fixed-rate loan, so she knows exactly how much her monthly payments will be.
What are conventional loans divided into?
Conforming and non-conforming loans
What is it called when the borrower would also be consolidating their debt to one payment?
Debt consolidation
What is the mortgage banker's primary business?
Earn the fees associate with loan origination
What is the purpose of the Government National Mortgage Association (GNMA), or Ginnie Mae?
Expand affordable housing financing
What loan programs are government-backed?
FHA, VA, USDA
Federal National Mortgage Association (FNMA)
Fannie Mae
deals with larger commercial banks
Fannie Mae
The guidelines that determine if a conventional loan is conforming or non-conforming are set by:
Fannie Mae AND Freddie Mac
Which GSE are often the ones buying large quantities of mortgage loans?
Fannie Mae and Freddie Mac
What's the difference between fannie mae and freddie mac?
Fannie Mae deals with larger commercial banks Freddie Mac works with smaller "thrift" banks
Who are the major players in the Secondary Mortgage Market?
Fannie Mae, Freddie Mac, Ginnie Mae, Farmer Mac
Federal Agricultural Mortgage Corporation
Farmer Mac
What government-sponsored enterprise focuses on agriculture loans?
Federal Agricultural Mortgage Corporation, or Farmer Mac
What government-sponsored enterprise buys conventional loans from depository institutes (although it also purchases VA and FHA loans and are insured by the US government?
Federal Home Loan Mortgage Corporation (FHLMC), or Freddie Mac,
What government-sponsored enterprise (GSE) purchases FHA and VA loans, as well as conventional, conforming loans? 'twas created by the RFC
Federal National Mortgage Association (FNMA) or Fannie Mae
Federal Home Loan Mortgage Corporation
Freddie Mac
Which of these happens when a borrower takes out a reverse mortgage:
The lender has a lien on the property.
Fixed-rate mortgages are good in a few ways:
The payments are always going to be the same. Whatever the interest rate might be in the world, the borrower is protected. 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 are mortgage loan originators?
The various businesses that create mortgages for borrowers
What happens when a borrower takes out an FHA loan?
They will be required to pay a mortgage insurance premium (MIP)
Why are conventional loans considered higher risk for lenders?
They're not backed by governemtn
How do GSEs fund their operations?
Through securitization
What are the advantages of non-conforming conventional loans?
Time and no limits
Some of the items the conventional lender will consider in making a loan are:
Total monthly expenses Total gross income per month Employment history Credit score and payment history Assets (checking, savings, and retirement accounts)
What is a mortgage broker?
a licensed professional who originates mortgage loans that are financed by one of several lenders the broker works with.
What does a rate cap protect a borrower from?
a sudden and excessive increase in interest rate
large remaining balance is due at the end of the loan's term + is not a fully amortized
balloon mortgage
A loan that is fully amortized will:
be paid off in full with the last scheduled monthly payment
frequently used to finance furnished condominium units
package mortgage
includes not only the real estate but also all personal property and appliances installed on the premises
package mortgage
Where does the money for conventional loans come from?
private lender
the borrower is the buyer and the lender is the seller
purchase-money mortgage
the loan is borrowed from the seller
purchase-money mortgage
What is included in a package mortgage?
real estate + all personal property + appliances installed on the premises
What could Priya have done differently with her ARM loan that could have potentially saved money?
refinanced to a fixed-rate loan before the first adjustment period
designed for people over the age of 62
reverse mortgage
has no monthly payments
reverse mortgage
ARMs can be disadvantageous to a borrower because:
the borrower might have trouble making payments if their rate increases
What is mortgage liquidity?
the freedom to sell mortgages easily
the remaining amount of the monthly payment goes towards the borrower's remaining principal
the remaining principal
GSEs are unique in the financial sector because:
they are created by the government, but privately owned
Jim is buying a home, but Bank of Aceable didn't qualify him for the full home price. He takes out a purchase-money mortgage to supplement the rest of the sales price. Where will Jim's payments go for the purchase-money mortgage?
to the seller
How are Conforming Loans made?
using the Uniform Residential Loan Application (Fannie Mae Form 1003 or Freddie Mac Form 65)
What is the primary mortgage market?
where loans are originated and funds are disbursed
What is the secondary mortgage market?
where mortgages are bought and sold
