Chapter 15: Types of Financing

The first step towards mortgage loans with adjustable interest rates:

Variable-rate mortgage

Variable Rate Mortgage

A mortgage loan in which the interest rate varies depending on market conditions.

(Interest can be adjusted up or down)

Office of Thrift Supervision (OTS)

Authorizes institutions to make the type of adjustable mortgage loan you are most likely to encounter in today's loan market place.

(Loan Format is ARM)

Adjustable Rate Mortgage (ARM)

A mortgage on which the interest rate rises and falls with changes in prevailing interest rates.

(Investors use a lot.)

The interest rate on these loans MUST be tied to some publicly available index that is mutually acceptable to the lender and the borrowers

The main requirement of ARM?

Monthly payments fall.

If interest rates fall-

Monthly payment rise.

If interest rates rise-

Benefit of adjustable-rate mortgage (ARM)

Carries an initial interest rate that is lower than the rate on a fixed rate mortgage of similar maturity

Disadvantage of ARM

Disadvantage of_______.

If interest rate rise, the borrower is going to pay more.

Index rate.

The interest rate on an ARM is tied to an?

1. It needs to be verifiable by the borrower

2. The rate is not controlled by the lender

Two government requirements of Index Rate.

Margin

Added to the index rate. Not a true reflection of the quality of the loan.

No

Is the margin by itself a true reflection of the quality of the loan?

Margin =

the lender's fixed amount

One Year

The most common adjustment period?

Interest rate cap

Lenders are now required by federal law to disclose an?

Interest rate cap

On an adjustable-rate mortgage, the limit on the amount that the interest rate can increase each adjustment period and over the life of the loan

Payment Cap

Sets a limit on how much the borrower's monthly payment can increase in any one year.

Negative Amortization

Accrual of interest on a loan balance so that, as loan payments are made, the loan balance rises.

Reamortized

Monthly payments will be adjusted upward by enough to stop the negative amortization.

More extensive information about the variable rate feature.

Regulation Z requires creditors to provide consumers with?

Consumer Handbook on Adjustable Rate Mortgages

Lenders must also provide prospective borrowers with an educational brochure about ARMs called?

Stated as a specified amount

The maximum interest rate must be?

An adjustable-rate loan program

VA loans are fixed-rate loans, but the FHA does not provide?

Teaser rates/ARMs

Rates that have been offered from time to time by a few lenders, but our best to avoid

Graduated Payment Mortgage

(GPM)

A mortgage with an interest rate and maturity that is fixed, but the monthly payment gradually rises because the initial monthly payments are insufficient to fully amortize the loan

To help borrowers qualify for loans with payments based off a future salary. Payments start low then gradually raise.

Objective of Graduated Payment Mortgage (GPM)

Equity Sharing

An arrangement where a party providing financing gets a portion of the ownership.

Variation of equity sharing

Shared Appreciation Mortgage (SAM)

Commercial real estate

Equity Sharing typically seen in?

The lender's share of the appreciated value of the home.

At loan termination, the borrower is obligated to pay the loan balance plus?

Package Mortgage

A mortgage that secures personal property in addition to real property.

Selling it without the prior consent of the lender is a violation of the mortgage.

Once an item of personal property is included in a package mortgage, what happens once it is sold?

Blanket Mortgage

A mortgage secured by two or more properties

Reverse Annuity Mortgage (RAM)

A loan to the homeowner whereby periodic payments are made to the borrower from the lender; typically for people 62 or older

1. Payment to the homeowner in a lump sum (sometimes referred to as a line of credit)

2. Monthly payments to the homeowner as an annuity for the reverse term of the loan.

Reverse Annuity Mortgage (RAM), the lender has two alternatives:

The elderly

The reverse mortgage can be particularly valuable for?

owe more than the value of the property.

If the loan balance exceeds the value of the property, the borrower, or estate, will never?

Construction Loan

Also called an interim loan. Short-term loan for new construction or remodeling of an existing structure.

Blended-Rate Loan

A refinancing plan that combines the interest rate on an existing morgage with current rates.

FHA, VA, and Conventional loans held by FNMA.

Blended Loans are available on:

Equity Mortgage or Home Equity line of Credit

A loan arrangement wherein the lender agrees to make a loan based on the amount of equity in a borrower's home.

The maximum amount of the loan is generally 70%-80% of the home value.

Affordable Housing Loan

An umbrella term that covers many slightly different loans that target first time home buyers and low to moderate income borrowers.

A person or family with an income of no more than 80% of the median income for the local area.

General definition of low income borrower?

Median

What is it called when there is an equal number of people with income above the number and below the number.

Mortgage Guaranty Insurance Company or GE Capital Mortgage Insurance Corporation.

Affordable housing loans can be privately insured through the:

Community Solutions Program

Flexible mortgages for school employees, police officers, firefighters, and healthcare workers. Promoted by Fannie Mae.

borrowers of one-to four-family homes.

Fannie Mae also produces the HomeReady program, which provides mortgage options for?

Fannie Neighbors

Another part of MyCommunityMortgage program

Fannie Neighbors

A nationwide neighborhood-based mortgage program designed to increase home ownership and revitalization in areas underserved by HUD

Seller Financing

A note accepted by a seller instead of cash.

Money spread for tax purposes.

Installment Contract.

Purchase Money Mortgage (PMM)

Refers to Seller Financing:

Purchase Money Mortgage

(PMM)

A note secured by a mortgage or deed of trust given by a buyer, as borrower, to a seller, as lender, as part of the purchase price of the real estate.

Seller Financing

In Georgia, the term purchase money mortgages refers to?

Wraparound Mortgage

A mortgage that encompasses any existing mortgages and is subordinate to them.

Subordination

The act of yielding to another.

Subordination

Another financing technique is?

Enables the seller to finance a buyer by permitting him/her to make a down payment followed by monthly payments.

A contract for a deed, also called an installment contract or land, enables what?

Seller

Title remains in the name of the?

Title is conveyed to the buyer.

When the final payment is made to the seller (or the property refinanced through an institutional lender):

Option

A right, for a given period of time, to buy, sell, or lease property at specified price and terms.

Speculative opportunities to person with limited amounts of capital.

Options can provide?

The options exercises the option and realizes a profit.

If prices do not rise, the optioned loses only the cost of the option; if prices do rise:

Yes

Was Georgia the first state to enact law specific to mortgage fraud?

Georgia Residential Mortgage Fraud Act

A state law that defines the crime of residential mortgage fraud and creates criminal penalties for engaging in this type of activity.

Illegal Flipping

Property purchased at a low price, appraised at a high value without valid reason, and resold at the higher price.

Silent Second

Involves increasing the sale price fraudulently and asking the seller to take a second loan with the increase in purchase price.

Chunking

A scheme where the borrower makes multiple, simultaneous application for a loan on one property.

1. To invest in mortgage loan pools through certificates guarantee by Ginne Mae and Freddie Mae available from stockbrokers.

2. Individuals can also buy junior mortgages at yields above Ginne Mae and Freddie Mae certificates.

Individuals can invest in mortgages in two ways:

Having it apprised

The best way to determine the value of the property is by?

Sale and Leaseback

An owner-occupant sells the property and then remains as a tenant.

Step-up Rentals

To hedge against inflation, when fixed rents are used in a long term lease.

The lessee. (the seller)

Property taxes are paid by?