1. South-Western Publishing©2002 By Charles J. Jacobus Real Estate Principles Ninth Edition Real Estate: An Introduction to the Profession Ninth Edition South-Western Publishing©2002

2. Chapter 14 Types of Financing _______________________________________ Note the original presentation has been edited by the presenter

3. South-Western Publishing©2002 Adjustable Rate Mortgage Interest rate Margin Adjustment period Interest rate cap Payment cap Negative amortization Disclosures What to look for?

4. Adjustable Rate Mortgage Index Rate –Based on some publicly available index One-year US Treasury security Six-month Treasury Bill Cost of funds to thrift institutions –Fed. Reserve publishes “1 year constant maturity” Disclosure required –Historical example & Worst Case Scenario –“the Consumer Handbook on ARMs”

5. Adjustable Rate Mortgages For Borrower Usually lower interest rate than fixed rate With lower rate borrower can qualify for larger loan BUT when interest rates rise, payment rises For Lender Allows lenders to better match long term loan interest rates to short term deposits Teaser rates Negative amortization may occur

6. Adjustable Rate Mortgages

7. ARM Example ARM starting at 7% increasing to 1% each year for 5 years (maximum of 12%)

8. ARM Compare Loan remaining at 7% through term

9. South-Western Publishing©2002 Other Financing Equity Sharing & Shared Appreciation Mortgage –Lender receives part of the equity/appreciation “Rich Uncle” Loan Package Mortgage –Including personal property in loan Graduated Payment Mortgage –Basing loan repayment on expected salary increases

10. Graduated Payment Mortgage Example (with negative amortization)

11. South-Western Publishing©2002 Other Financing Blanket mortgage –Loan that covers more than one property Reverse Mortgage Interim Loan & Construction Loan –Builder “draws” payments as needed. Often high risk. Equity Loan Blended-Rate Loan

12. Blended Rate Borrower does not qualify for 100% financing Takes out two loans

13. Affordable Housing Loans Underwriting standards are modified to recognize different forms of credit responsibility. Prepurchase home buyer education. Low down payment. Usually to first time home buyer Most are owner occupied Different credit criteria

14. Asset Integrated Mortgage Combines a home loan and a fixed insurance annuity. Adds a “forced savings plan” to loan” Uses part of down payment to purchase an annuity which is pledged as additional collateral. Allows borrower to build a nest egg BUT the after tax return is generally negative when compared to a disciplined investment plan.

15. South-Western Publishing©2002 Comparison of Conventional Mortgage to AIM

16. Seller Financing The current owner of the property agrees to accept part of the purchase price in the form of a loan ( promissory note and mortgage or deed of trust ) also becoming the lender in the transaction. Types –Contract for Deed, Installment Contract or Land Contract (title remains in Seller’s name) –Lease with Option to Purchase –Carry-back, Taking Back Paper and Wrap-around

17. South-Western Publishing©2002 Wraparound Mortgage BuyerSeller $20,000 Debt $60,000 Debt 1 st Lender (Includes wrapped $20,000)

18. Using Equity Equity mortgage Cash out refi Sale Leaseback Reverse annuity mortgage (RAM) Age6575 FMV$100,000 Loan Amt.$59,100$68,900 Monthly$287$390

19. Overly Creative Financing and Purchase Techniques Brokers must advise seller/clients to get advice concerning certain transactions. Brokers must submit all written offers, however brokers must be aware that their position of trust and confidence may not be abused and should not take part in such schemes Offers requiring Seller to subordinate their interest in the property, taking bonds instead of cash are to be scrutinized closely

20. Investing in Mortgages 1.Mortgage loan pools a.Guaranteed by Ginnie Mae and Freddie Mac b.May be sold prior to maturity 2.Direct purchase from Mortgage Broker or from individual looking to borrow money a.Higher yield b.More risk c.Check title and appraisal

21. South-Western Publishing©2002 Key Terms ARM Asset intergrated mortgage Blanket mortgage Equity sharing GPM Negative amortization Option Package mortgage RAM Seller Financing Wraparound mortgage