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Mastering Fixed Rate Mortgage Loans: Understanding Payment Patterns, Effective Costs, and Risks

morganjoseph avatar
morganjoseph
14 diapositives · 183 Views · Jan 01, 2020

Learn about fixed rate mortgage loans, including characteristics, determinants of interest rates, payment patterns, loan constants, closing costs, and examples to calculate effective interest costs. Dive into other fixed rate mortgages, regulations, and reverse annuity mortgages.

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  1. CHAPTER FOUR FIXED RATE MORTGAGE LOANS

  2. Chapter Objectives • Characteristics of constant payment (CPM), constant amortization (CAM), and graduated payment mortgages (GPM) • Effective cost of borrowing v.s. lenders effective yield • Calculate discount points or loan origination fees

  3. Determinants of Mortgage Interest Rates • Real rate of interest- the required rate at which economic units save rather than consume • Rate of inflation • Nominal rate or constant rate i= r+f • Nominal rate= real rate plus a premium for inflation

  4. Determinants of Mortgage Interest Rates • Default risk- creditworthiness of borrowers • Interest rate risk- rate change due to market conditions and economic conditions • Prepayment risk- falling interest rates • Liquidity risk • i=r+ f+ P…

  5. Development of Mortgage Payment Patterns • Constant amortization mortgage (CAM) • Constant payment • Interest computed on the monthly loan balance • Constant amortization amount • Total payment= constant amortization amount plus monthly interest

  6. Development of Mortgage Payment Patterns • Constant payment mortgage (CPM) • Constant monthly payment on original loan • Fixed rate of interest for a given term • Amount of amortization varies each month • Completely repaid over the term of the loan

  7. Development of Mortgage Payment Patterns • Graduated payment mortgage (GPM) • Mortgage payments are lower in the initial years of the loan • GPM payments are gradually increased at predetermined rates

  8. Loan Constants • Used prior to financial calculators • Loan constant= annual debt service original loan balance

  9. Loan Closing Costs and Effective Borrowing Costs • Statutory costs • Third party charges • Additional finance charges i.e. loan discount fees, points

  10. Effective Interest Cost Examples • Contractual loan amount $60,000 • Less organization fee(3%) $ 1,800 • Net cash disbursed by lender $58,200 • Interest rate= 12% • Term 30 years

  11. Effective Interest Cost Examples Continued • Calculator solution • n=360 • PMT= -617.17 • PV= 58,200 • FV= 0 • i=1.034324 (12.41% annualized)

  12. Other Fixed Rate Mortgages • Characteristics and Requirements: • Regulation Z- truth in lending (APR) • RESPA- Real Estate Settlement Procedures Act • Prepayment penalties and other fees • Reverse annuity mortgages (RAMs)

  13. Reverse Annuity Mortgage Example • Residential property value $500,000 • Loan amount (to be disbursed • in monthly installments) $250,000 • Term 10 years 120 months • Interest Rate 10%

  14. Reverse Annuity Mortgage Example Continued • Calculator solution: • FV=-250,000 • i=10%/ 12 • PMT= ? • n=120 • Solve for payment $1220.44