Financial Markets- Module 8

Collateral

Collateral

All mortgage loans are backed by a specific piece of property that serves as collateral to the mortgage loan. As part of the mortgage agreement, the financial institution will place a lien against a property that remains in place until the loan is fully paid off.

Lien

is a public record attached to the title of the property that gives the financial institution the right to sell the property if the mortgage borrower defaults or falls into arrears on his or her payments. The mortgage is secured by the lien—that is, until the loan is paid off, no one can buy the property and obtain clear title to it.

Down payment

A portion of the purchase price of the property a financial institution requires the mortgage borrower to pay up front.

Private Mortgage Insurance

Insurance contract purchased by a mortgage borrower guaranteeing to pay the financial institution the difference between the value of the property and the balance remaining on the mortgage.

Mortgage Maturities

A mortgage generally has an original maturity of either 15 or 30 years

Amortized

A mortgage is amortized when the fixed principal and interest payments fully pay off the mortgage by its maturity date.

Balloon payment mortgage

Mortgage that requires a fixed monthly interest payment for a three- to five-year period. Full payment of the mortgage principal is then required at the end of the period.

Interest Rates

Possibly the most important characteristic identified in a mortgage contract is the interest rate on the mortgage. Mortgage borrowers often decide how much to borrow and from whom solely by looking at the quoted mortgage rates of several financial institutions. In turn, financial institutions base their quoted mortgage rates on several factors.

Fixed-rate mortgage

mortgage that locks in the borrower’s interest rate and thus the required monthly payment over the life of the mortgage, regardless of how market rates change.

Adjustable-rate mortgage

A mortgage in which the interest rate is tied to some market interest rate. Thus, the required monthly payments can change over the life of the mortgage.

Discount points

Interest payments made when the loan is issued (at closing). One discount point paid up front is equal to 1 percent of the principal value of the mortgage.

Application fee

Covers the issuer’s initial costs of processing the mortgage application and obtaining a credit report.

Title search

Confirms the borrower’s legal ownership of the mortgaged property and ensures there are no outstanding claims against the property.

Title insurance

Protects the lender against an error in the title search.

Appraisal fee

Covers the cost of an independent appraisal of the value of the mortgaged property.

Loan origination fee*.*

Covers the remaining costs to the mortgage issuer for processing the mortgage application and completing the loan.

Closing agent and review fees

Cover the costs of the closing agent who actually closes the mortgage.

Other costs

Any other fees, such as VA loan guarantees, or FHA or private mortgage insurance.

Mortgage refinancing

occurs when a mortgage borrower takes out a new mortgage and uses the proceeds obtained to pay off the current mortgage

Mortgage Amortization

The fixed monthly payment made by a mortgage borrower generally consists partly of repayment of the principal borrowed and partly of the interest on the outstanding (remaining) balance of the mortgage