Debt As of April 2013 Average Credit Card Debt: $15,000+ Average Mortgage Debt: $150,000+ Average Student Debt: $33,000+

What is debt? Debt - Money owed to a lender for a set of terms including time frame, interest rate, and repayment schedule Terms - The details of the debt such as term, interest rate and repayment schedule Term - The amount of time until the full amount of the debt plus interest must be paid

What is debt, cont’d Interest Rate - A percentage of the amount owed that is a payment to the lender above and beyond the original amount borrowed Most common debts: Student Loans Car Loans Mortgage Loans Credit Card debts

Mortgage Debt Generally, this is the biggest debt a person owns One of the biggest tax write offs a person can have. Interest paid on a mortgage debt is tax deductible (with some limitations). Can apply to a private residence, second home, investment property, mixed-use building, or commercial structure (with some limitations).

Mortgage Debt, cont’d Due to the fact that the interest is tax deductible and that it is used to purchase an asset that, generally is increasing in value, mortgage debt is thought to be “good debt”.

Mortgage Vocab - Documents Mortgage – A debt instrument that is secured by the collateral of specified real estate property. The borrower makes payments against the debt on a predetermined schedule. Mortgages are also known as "liens against property" or "claims on property."

Mortgage Vocab - Documents Promissory Note – Referred to as “the Note”, “Note” or “Paper”. This spells out the terms of the loan and the actions to be taken in the event of a default as well as the responsibility of the home owner to the lender.

Mortgage Vocab – People and Entities Lender – Person or entity granting a loan Servicer – person or entity collecting payments on your loan Bank – A financial institution that will lend you money out of the deposits held at the bank. They are in effect lending you their own money. They will typically hold the note and act as the servicer as well as engage in other lending.

Mortgage Vocab – People and Entities Mortgage Banker – A financial institution that will lend you money out a warehouse line of credit. While they are lending you their own money, they will typically sale the paper to a servicer to collect payments. A mortgage bank ONLY handles mortgage loans.

Mortgage Vocab – People and Entities Mortgage Broker – An intermediary who brings mortgage borrowers and mortgage lenders together, but does not use its own funds to originate mortgages. They manage all the paperwork but the approval and money will come from a separate entity.

Mortgage Vocab – Terms and Conditions Down Payment - Rate: Set according to market forces. Typically tied to the 10-year T-Note but other indices and rates can influence it. Repayment: 30-year fixed, 15-year fixed, and 30/15-year Adjustable Rate Mortgage (ARM)

Mortgage Vocab – Terms and Conditions Fixed: The interest rate is set at the signing of the loan documents. The rate will remain the same throughout the life of the debt

Mortgage Vocab – Terms and Conditions ARM: May have a set rate for a period of time but the rate will adjust periodically to reflect current market rates at that time. The adjustment can be up or down and is capped to a maximum increase or decrease.

People/Entities Involved Buyer – The person or entity purchasing a piece of real estate. Typically, this is the person securing a mortgage Seller – The person or entity selling a piece of real estate. Typically, this person holds a debt against the property which will need to be paid off in order to transfer ownership

People/Entities Involved Lender – the person or entity that is granting the loan in exchange for the mortgage against the property Servicer – the person or entity that currently owns the mortgage and collects the payment. The Servicer is also in charge of escrow accounts and payments

People/Entities Involved Appraisor – a person hired by the buyer to appraise the properties value for the purposes of sale. This value should indicate a fair market value. Assessor – a person assigned by a municipality to assess the value of a property for the purposes of taxation. Inspector – a person hired by the buyer of a property who will certify it safe and sound

People/Entities Involved Title Agent – a person who examines the title/deed of the property and handles the transfer of ownership in a legal sense Closing Agent – a person that arranges the final document signing and transfer of ownership and monies. This person may also be the Title Agent. This person will handle the payoff of any pervious mortgage debt and the payments due to all other agents involved in the process.

Mortgage Payments Principal Interest Taxes Insurance Mortgage Payments include more than just payments on the loan. The total bill is termed the PITI Principal Interest Taxes Insurance

Mortgage Payments Principal – money paid to reduce the amount owed Interest – a percentage of the amount owed paid to the lender

Mortgage Payments Taxes – money collected by the servicer monthly and saved in an escrow account to be paid when real estate taxes are due. Property Taxes collected by the local government. Typically used for maintenance and investment into the community. This is the primary source of funding for education.

Mortgage Payments Insurance Home Owners Insurance – money paid to a private company to insure the property against damages. Does NOT include flooding or water damage. Private Mortgage Insurance – money paid to a private company to insure the loan against default. This protects the servicer or holder of the mortgage in the event that YOU stop payment. It is often required but does NOT protect you.

Calculating Mortgage Payments We will be assuming a 30yr fixed Mortgage Loan P&I Formula: C is the monthly payments, r is the rate, P is the principal , and n is the number of MONTHLY payments

Calculating Mortgage Payments Taxes The tax rate for Flagstaff is roughly 2.5% of the assessed property value. Insurance Homeowners Insurance: Private Mortgage Insurance:

Payment Schedule For a 30-year fixed schedule, the P&I payments will remain consistent; taxes and insurance will change based on the market factors and politics In the beginning, the majority of the P&I payment is interest but that portion will decrease over time. The vast majority of mortgage loans do not reach a full 30 years but they are refinanced prior to their end dates.

Homework #8 Looking back at Homework #3.