Mortgage Designs Fixed, Adjustable, Balloon, and Others Andrew Grill May 11 th, 2011

What we’re covering Components A brief history of mortgages in the US Types of Mortgages Price Comparison of types What would you do?

Mortgage Design Components Principal Amount Interests –Types and Rates Term or Length of loan

Brief History

Today - Loan Types Fixed Rate Mortgage Adjustable Rate Mortgage Balloon Others

Fixed Rate Mortgage Fixed monthly payment for term 10, 15, 20, 30 year terms 30 year term most common today Who invests? Non-investors with stable lifestyle, not looking to move in near term

Adjusted Rate Mortgage (ARMs) ~1% better rate than 30 year fixed 3, 5, 7, 10 year terms Example “5/2/2” Cap “Sophisticated” Investors Plenty of money in bank

Balloons Remaining money is due at end of term 5, 7 most common terms Investors adverse to risk Plan on paying or refinancing before balloon payment is due “reset option” (using current market rates) More common in commercial Floating or Fixed interest rate May use monthly payments similar to 30 year

Others Jumbo Loan - Above conforming limits (~$730k) Interest Only Loan - 5 or 10 year interest period, remaining 20 years for principal

Others Negative ARM, Graduated Payment, deferred interest - Unpaid accrued interest is capitalized into principal Reverse Mortgage - 62 years and older

Price Comparison Amortization Schedule Comparison –30 year fixed –15 year fixed –ARM –Balloon

Price Comparison - Assumptions $200,000 loan 15 year interest rate = 4.125% 30 year interest rate = 4.750% 5/1 ARM 3.25% -.25%+, 9.50% ceiling (12% possible) 7/1 Balloon 5.00% Final payment 83 rd payment

Annual Price Comparison – years 1-5

Annual Price Comparison – years 5-10

Price Comparison – Totals

What would you do? BalloonARM15 Year Fixed 30 year fixed 5 years $64,418.45$52,224.60$89,516.40$62, years $266,076.24$108,611.52$179,032.80$125, years $171,312.36$268,549.20$187, years $239, $250, years $311, $312, years $384, $375,584.40

Questions

References "Balloon/Reset Mortgages." Freddie Mac. N.p., n.d. Web. 4 May J., Frank, Franco Modigliani, and Frank Joseph.Foundations of financial markets and institutions. Pearson College Div, Print. Maples, Gareth. "The History of Home Mortgages."The History Of. N.p., 9/11/2008. Web. 8 May Norlander, Brent. Personal Interview by Andrew Grill. 27 April 2011 Office Hours with Professor Brooks