Chapter 18 Mortgage Mechanics

Mortgage Mechanics Interest only loans Interest only (Fig. 14.2) Understanding the amortization process Amortizing schedule (Table 14. 3)

Amortization Table

Understanding the fixed rate mortgage: prepayment Prepayment Example Understanding the fixed rate mortgage: Refinancing Refinancing Example

Understanding the fixed rate mortgage: discount points and effective interest rates Discount points Origination fees Effective interest rate Example

Alternatives to the Fixed-Rate Mortgage: Mechanics for a two-step mortgage Two-step example Mechanics of an adjustable-rate mortgage ARM example

Understanding Fixed Rate Mortgages: Effective Interest Rates with Discount Points and Prepayment When a borrower expects to prepay a loan before it is due (as most borrowers do), discount points paid at origination may have dramatic impact on the effective interest rate of the loan The earlier a loan with discount points is prepaid, the greater the effective interest rate for the loan

Alternatives to the Fixed Rate Mortgage Two-step mortgages – loans in which the interest rate is adjusted to match current market rates at the end of the fifth or seventh year Adjustable rate mortgages – loans in which the interest rate is adjusted at the end of each year to match current market rates