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Chapter 18 Mortgage Mechanics

Chapter 18 Mortgage Mechanics. Mortgage Mechanics. Interest only loans Interest only (Fig. 14.2) Understanding the amortization process Amortizing schedule (Table 14. 3). Amortization Table. Understanding the fixed rate mortgage: prepayment Prepayment Example

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Chapter 18 Mortgage Mechanics

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  1. Chapter 18Mortgage Mechanics

  2. Mortgage Mechanics • Interest only loans • Interest only (Fig. 14.2) • Understanding the amortization process • Amortizing schedule (Table 14.3)

  3. Amortization Table

  4. Understanding the fixed rate mortgage: prepayment • Prepayment • Example • Understanding the fixed rate mortgage: Refinancing • Refinancing • Example

  5. Understanding the fixed rate mortgage: discount points and effective interest rates • Discount points • Origination fees • Effective interest rate • Example

  6. Alternatives to the Fixed-Rate Mortgage: • Mechanics for a two-step mortgage • Two-step example • Mechanics of an adjustable-rate mortgage • ARM example

  7. Understanding Fixed Rate Mortgages: Effective Interest Rates with Discount Points and Prepayment • When a borrower expects to prepay a loan before it is due (as most borrowers do), discount points paid at origination may have dramatic impact on the effective interest rate of the loan • The earlier a loan with discount points is prepaid, the greater the effective interest rate for the loan

  8. Alternatives to the Fixed Rate Mortgage • Two-step mortgages – loans in which the interest rate is adjusted to match current market rates at the end of the fifth or seventh year • Adjustable rate mortgages – loans in which the interest rate is adjusted at the end of each year to match current market rates

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