Ch. 28 - Types of Loans

Adjustable Rate Mortgage

-the interest rate is linked to an economic index. -The loan starts at one rate of interest, but then it fluctuates up or down over the life of the loan as the index changes. -The loan agreement describes how the interest rate will change and when. -The interest rate the borrower pays is usually the index rate plus a margin.(lender's cost of doing business)

Discount points are: prepaid principal. outstanding debits. prepaid interest. payable debts.

prepaid interest.

Annual Percentage Rate

-(APR) describes the interest rate for a whole year (annualized), rather than just a monthly fee/rate, as applied on a mortgage loan. -It is a finance charge expressed as an annual rate. - APR is intended to make it easier to compare lenders and loan options.

Conforming and Non-Conforming Loans

--A conforming loan --is a mortgage loan that conforms to GSE (Fannie Mae and Freddie Mac) guidelines. The most well-known guideline is the size of the loan, which as of 2016 was limited to $417,000 for single family homes in the continental US. --A non-conforming loan-- is a loan that fails to meet bank criteria for funding. Reasons include the loan amount is higher than the conforming loan limit (for mortgage loans), lack of sufficient credit, the unorthodox nature of the use of funds, or the collateral backing it.

Straight Loan

--also called an interest-only loan --the monthly payments are allocated only to interest. No principal is paid off. --At the end of the term, the borrower must be able to pay off the entire principal amount or get another loan. -wise choice for someone who plans to own the property for a short time and believes the property will appreciate during that time

Fixed-rate fully amortized loans have two distinct features.

-The interest rate remains fixed for the life of the loan. -The payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term. -The most common fixed-rate loans are 30-year mortgages, because the payment is stable and there is always the opportunity to pay the balance down or to refinance for a better rate at a later date

Negative Amortization

-When a payment is made that is less than the interest charge due, deferred interest is created and added to the loan's principal balance, creating negative amortization.

Fixed Rate Mortgage vs. Adjustable Rate Mortgage

-When borrowers make fixed extra payments to principal on a fixed rate mortgage, they shorten the term but don't change the payment. -FRMs attractive to those who want to shorten their term. -When they make fixed extra payments to principal on an ARM, they reduce the payment on rate adjustment dates, but don't change the term. -ARMs attractive to those who want to reduce their payments

An adjustable-rate mortgage

-a loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets. -sometimes come with additional features such as; --convertibility--option to convert to a fixed-rate mortgage, avoid rising interest rates and usually include specific conditions. --assumability--new home buyer has the ability to take over the existing mortgage of the seller as long as the lender of that mortgage approves, risk can hold the seller liable --prepayment penalty--penalty will be assessed if the mortgage is prepaid within a certain time period, based on a percentage of the remaining mortgage balance or a certain number of months' worth of interest.

Wraparound Loans

-allows a borrower who has an existing loan to get another loan from a second lender without paying off the first loan. -The second lender issues a new larger loan to the borrower at a higher interest rate. -new loan is a combination of the first loan and the second loan. -The borrower makes the new higher payments to the second lender, and then the second lender pays the first lender out of those funds. -one type of seller-financing -often used in a refinancing situation or for the purchase of a home when a buyer cannot prepay the existing mortgage, either because of a lock-in clause or a high prepayment penalty -attractive to lenders because they can leverage a lower interest rate on the existing mortgage into a higher yield for themselves.

Blanket Mortgages

-covers more than one parcel of real estate, owned by the same buyer. -used to secure construction financing for a proposed subdivision or a condominium project. -Due to the nature of land development, a builder needs a way to release single parcels of the project as they are completed. -The mechanism for doing this is a release clause-clause allows for parcels/units to be sold from a blanket mortgage. -no release clause? the developer would be required to pay off the entire loan

package loans

-finances the purchase of a home along with the purchase of personal items -monthly payments on the loan include the principal, interest and some pro-rated payment for the appliances. -some believe they will have less risk of default. -Borrowers like them because they can pay for personal items over the extended period of the loan, rather than have to make outright purchases. - is the interest on the home loan is tax-deductible, while the interest on a consumer loan is not. -popular in the sale of new subdivision homes and furnished condominiums.

Novation

-hybrid of mortgage assumption and mortgage assignment. -Legally, novation equals a new obligation, but with the same terms, including interest rate, of the former mortgage loan. -similar to the concept of assignment, but there are fundamental differences between the two. --Assignment cannot transfer the mortgage obligation, but novation can transfer both rights and obligations. --Assignment does not always require the consent of the party that benefits from the transfer; novation does. --Assignment does not extinguish the original contract, but novation does.

Balloon Mortgage

-is a loan that has one large final payment due when the loan matures. -The major problem with a balloon payment loan is that the borrower has to come up with a large sum of money at the end of the term. -are partially amortized loans. This means that the monthly payments are not large enough to fully amortize the loan by the end of the term, leaving the large balloon payment due.

Home Equity Loan

-is an alternative to refinancing. -It can be given as a fixed amount or it can be a line of credit that the homeowner can borrow against as he or she needs.

Open-End Loan

-is an expandable loan in which the lender gives the borrower a limit up to which he or she may borrow. -Each advance the borrower takes is secured by the same mortgage. This loan is also known as a mortgage or deed of trust for future advances. -can save the borrower the time and expense of refinancing the property at some future date -can use to purchase personal property. -An open-end loan usually has more favorable terms than a home improvement loan, which usually has a higher interest rate and must be repaid in a shorter period of time.

Purchase Money Loan

-is most commonly a technique in which the buyer borrows from the seller in addition to the lender. -created at the time of the purchase and delivered at the time the property is transferred as part of the sale transaction. -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 or junior mortgage. -can also be a senior or first loan.

Mortgage Assumption

-is the act of acquiring title to a property that already has an existing mortgage and agreeing to be personally liable for the terms and conditions of the mortgage, including the payments. -There is little reason for a lender to relieve the original seller from liability on an assumed note. Lenders usually prefer to have both the buyer and the seller remain liable.

pledged-asset mortgage

-may avoid paying PMI or being charged a higher interest rate by providing securities and the home as collateral. -The two most common types of pledged mortgages 1)package loans 2)blanket mortgages.

Paid in Arrears

-mortgage loans are paid in arrears -when you make a payment on the first of a month (most contemporary) you are paying the previous month's interest. - end will be significant

Mortgage assignments

-occur when the original lender transfers the mortgage loan to a third party. -Lenders who sell mortgages, which is most of them, assign their mortgages to others, who become the owners of the loans.

predatory lender

-one that literally "preys" on the customers who may fall into the "B," "C" or "D" lending categories, particularly those who do not speak English, are poorly educated or are elderly. -Predatory lending practices can leave victims homeless and defeated, stripped of self-respect and hope, their credit ruined. -Basing an unaffordable loan on the applicant's assets rather than his or her ability to repay the loan. -Encouraging a borrower to refinance a loan so that the lender can charge high points and fees for the new loan. This is called loan flipping. Sometimes the borrower also pays a higher interest rate than with the original loan.

seller leaseback

-seller rent back or sale-leaseback -is a transaction in which a person sells property and then leases or rents from the new property owner. -The seller realizes profit from the sale of the property while the buyer is assured of rental income from the lease agreement. -typically used by commercial enterprises to free up money that has been tied up in the real estate to use as working capital in the business.

Sale "Subject To" a Mortgage;

-that person is not personally liable to the lender for payment of the mortgage. The seller is still responsible for making the mortgage payments.

Fully Amortized Mortgage/plan

-the borrower has the same payment amount every month. The payment goes first to the interest and then to the principal. Over the life of the loan, the amount going toward interest decreases, while the amount going to principal increases. -early years of the loan, the principal payment is very small, so it takes several years for the borrowers to increase their equity in the property. However, closer to the end of the repayment period, the borrowers' equity increases much more quickly -straight amortized loan, the borrower pays a different amount with each payment

Reverse Annuity Mortgage (RAM)

-the lender is making payments to the borrower. -attractive to senior citizens who often have fixed incomes that are low. -allows older property owners to receive regular monthly payments from the equity in their paid-off property without having to sell. -The paid-off property is pledged to the lender as collateral. In return, the lender sends a regular monthly check (or annuity) to the borrower until a certain balance has been reached. -must be 62 and live at home

Construction Loan

-type of open-end mortgage, also known as interim financing. -finances the cost of labor and materials as they are needed and used throughout a building project. -different from other open-end loans because the collateral typically used to secure the loan has not yet been built, so only the land itself is available as collateral when the lender makes the original loan. -Lenders commitment for a loan at 75 percent of the property's total value. -different because the lender has to know the "story" behind the planned construction before it will be willing to lend money to

The most common fixed-rate loans are: 10 year mortgages. 15 year mortgages. 25 year mortgages. 30 year mortgages.

30 year mortgages.

What type of mortgage is a loan that has one large final payment due when the loan matures? A variable rate mortgage An interest only mortgage A reverse mortgage A balloon mortgage

A balloon mortgage

What type of loan covers more than one parcel of real estate, owned by the same buyer? A package loan A balloon loan A fixed rate loan A blanket loan

A blanket loan

What is a type of open-end mortgage, also known as interim financing? A construction loan A balloon mortgage A partially amortized loan an adjustable rate mortgage

A construction loan

With what type of loan do owners have the ability to borrow against the equity they have built up in their home? An ARM A balloon loan A home equity loan A combination mortgage

A home equity loan

Buyer Alice wants a loan to pay for the purchase of the property and to buy major appliances. What type of loan is Alice wanting?

A package loan is one that finances the purchase of a home along with the purchase of personal items, such as a washer, a dryer, a refrigerator, an air conditioner, carpeting, and furniture.

What is a technique in which the buyer borrows from the seller in addition to the lender? An unsecured loan A purchase money loan A personal line of credit A variable rate loan

A purchase money loan

What is a transaction in which a person sells property and then leases or rents from the new property owner? A sublease A utility lease A seller leaseback A charter lease

A seller leaseback

How does a seller leaseback transaction work?

A seller leaseback, also called a seller rent back or sale-leaseback, is a transaction in which a person sells property and then leases or rents from the new property owner. The seller no longer owns the property, but lives in the property for the length of time stated in the rental agreement.

With what type of loan does the borrower pay a different amount with each payment? A fully amortized loan A partially amortized loan A conventional loan A straight amortized loan

A straight amortized loan

With what type of plan does a borrower make a periodic payment of principal plus interest? An assessment plan An amortization plan An acceleration plan A conventional plan

An amortization plan

What is the major difference between a mortgage assignment right and a mortgage novation right?

Assignment cannot transfer the mortgage obligation, but novation can transfer both rights and obligations.

What type of mortgage feature allows a new buyer to assume the seller's mortgage?

Assumability

sub-prime borrowers.

Borrowers who fall into the "below A" categories -"A"=qualified borrower is approved for a mortgage loan -When lenders provide loans to unqualified homebuyers - those who have poor credit and whose ability to repay the loan is risky because of their income, those lenders are giving sub-prime loans.

What type of fee is used to compensate loan officers?

Origination points

Interest

Interest is the charge for the privilege of borrowing money, typically expressed as annual percentage rate -ways to handle interest; --mortgage points -paid in arrears

What term describes a new obligation, but with the same terms, including interest rate, of the former mortgage loan? Option Alternate Novation Replacement

Novation

What type of loan allows a buyer to borrow funds from the seller in addition to the lender?

Purchase Money Loan

How is the interest rate in an adjustable-rate mortgage (ARM) determined?

The interest rate is linked to an economic index.

How does a reverse annuity mortgage operate?

With a reverse annuity mortgage (RAM), the lender is making payments to the borrower. The RAM allows older property owners to receive regular monthly payments from the equity in their paid-off property without having to sell.

With a traditional mortgage, the house alone is used as collateral for the loan. Typically, lenders require: a 10% down payment. a 15% down payment. a 20% down payment. a 25% down payment.

a 20% down payment.

A type of mortgage that will shorten the loan by calling for half the monthly payment every two weeks is called: a biweekly mortgage. an occurring mortgage. a bimonthly mortgage. a periodical mortgage.

a biweekly mortgage.

A wraparound loan is attractive to lenders because they can leverage a lower interest rate on the existing mortgage into: a cash advance. an interest only loan. negative amortization. a higher yield for themselves.

a higher yield for themselves.

An agreement between a buyer and seller of property in which the buyer makes payments toward full ownership but the title is held by the owner until the full payment is made is called: a land contract. a balloon contract. a purchase money loan. a seller carryback.

a land contract.

The act of acquiring title to a property that already has an existing mortgage and agreeing to be personally liable for the terms and conditions of the mortgage is called: a mortgage assignment. a refinance. a mortgage assumption. a leaseback.

a mortgage assumption.

The term annual percentage rate of charge (APR) describes the interest rate for: one month. each quarter. 6 months. a whole year.

a whole year.

A loan which allows a borrower who has an existing loan to get another loan from a second lender without paying off the first loan is called: an ARM. a wraparound loan. a conventional loan. an assumable loan.

a wraparound loan.

The two most common types of pledged mortgages are package loans and: rehab loans. adjustable rate mortgages. blanket mortgages. PMI.

blanket mortgages.

The sale and leaseback arrangement is typically used by: commercial enterprises. residential investors. brokers. USDA land contracts.

commercial enterprises.

Land Contract

is an agreement between a buyer and seller of property in which the buyer makes payments toward full ownership, but in a land contract, the title or deed is held by the owner until the full payment is made

balloon payment loans are: fully amortized loans. partially amortized loans. not amortized. straight amortized loans.

partially amortized loans.

A package loan is one that finances the purchase of a home along with the purchase of: a home warranty. closing costs. personal items. discount points.

personal items.

A loan negatively amortizes when scheduled payments are made that are less than: the full amount. the principal. the taxes. the interest charge.

the interest charge.

With a fully amortized loan, the borrower has the same payment amount every month, which goes first to pay: the interest. the taxes. the principal. the loan cost.

the interest.

With an assumable mortgage, a new home buyer has the ability to take over the existing mortgage of the seller as long as: the seller agrees. the lender approves. the new home buyer has a 25% down payment. a home warranty is provided.

the lender approves.

A wraparound mortgage is only possible if: the lender agrees. it is signed by the buyer and seller. the title company can process it. the original loan documents allow it.

the original loan documents allow it.

Mortgage Points

two types; Origination points and discount points. In both cases, each point is equal to 1% of the total amount mortgaged. --Origination points-- -used to compensate loan officers. -Not all require the payment, and those that do are often willing to negotiate the fee. -fee is tax-deductible if it was used to obtain the mortgage and not to pay other closing costs. --Discount points -- -are prepaid interest. -The purchase of each point generally lowers the interest rate on your mortgage by 0.25%. -Most lenders provide the opportunity to purchase anywhere from zero to three discount points. -The more points you pay, the lower the interest rate on the loan.