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1 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin CHAPTER 15 Mortgage Markets Primary Mortgage Market –lenders.

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Presentation on theme: "1 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin CHAPTER 15 Mortgage Markets Primary Mortgage Market –lenders."— Presentation transcript:

1 1 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin CHAPTER 15 Mortgage Markets Primary Mortgage Market –lenders and borrowers Secondary Mortgage Market –conduits, investment bankers and investors Federal National Mortgage Assoc.“Fannie Mae” Federal Home Loan Mortgage Corporation “Freddie Mac”

2 2 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin CONVENTIONAL FIXED- PAYMENT MORTGAGE Conventional Loans –conforming loans –nonconforming loans (e.g., jumbo loans) Fixed-Payment, Fully-Amortizing Mortgages –principal, interest, term, payment frequency –amortization

3 3 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Fixed-Payment Loan Amortization Schedule

4 4 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 30-Year and 15-Year Fixed-Payment Mortgages

5 5 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Alternative Fixed-Payment Amortization Schedules Interest-Only Mortgages Partially-Amortizing Mortgages Early-Payment Mortgages

6 6 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Adjustable Rate Mortgages The Index and Margin Index + Margin = Market Interest Rate Initial Interest Rate, Adjustment Interval, Rate Caps, and Teasers The new contract rate is the minimum of: –current index + margin, or –previous contract rate + annual cap, or –initial contract rate + life-of-loan cap.

7 7 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin ARM (2/6) Interest Rate Adjustments

8 8 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin PRIVATE MORTGAGE INSURANCE PMI is generally required on conventional loans with LTVs > 80%. PMI is usually written to cover the lender for losses up to 20% of the loan amount in the event of default. PMI coverage may be canceled when the remaining loan balance is less than 80% of the property’s current market value.

9 9 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin OTHER MORTGAGE TYPES Purchase Money Mortgages Package Mortgages Reverse Annuity Mortgages (RAMs)

10 10 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin HOME EQUITY LOANS Types of Loans –closed end loans –open-end lines of credit How Much Can One Borrow? Advantages and Disadvantages

11 11 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin THE MORTGAGE LOAN DECISIONS Up-Front Financing Costs Steps to Determining the Effective Cost of Borrowing –Calculate the monthly payment. –Calculate the balance at the end of the holding period. –Determine the relevant cash flows. –Calculate the effective cost of borrowing. Annual Percentage Rate (APR)

12 12 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Comparing Mortgage Options

13 13 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin The Refinance Decision


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