CH 7 326 - Chapter 7-Mortgage Markets Mortgages are loans...

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Chapter 7-Mortgage Markets Mortgages are loans to individuals or businesses to purchase homes, land, or other real property Many mortgages are securitized Many mortgages are pooled and sold and then the mortgage payments are used to collateralize mortgage-backed securities (MBSs) Mortgages differ from bonds and stocks mortgages are backed by a specific piece of real property primary mortgages have no set size or denomination comparatively little information exists on mortgage borrowers Primary Mortgage Market Four basic types of mortgages are issued by financial institutions home mortgages are used to purchase one- to four-family dwellings (called “single-family mortgages”) multifamily dwellings mortgages are used to purchase apartment complexes, townhouses, and condominiums commercial mortgages are used to finance the purchase of real estate for business purposes farm mortgages are used to finance the purchase of farms Mortgage Characteristics Collateral : lenders place liens against properties that prevent sale until loans are fully paid off A down payment is a portion of the purchase price of the property a financial institution requires the borrower to pay up front private mortgage insurance (PMI) is generally required when the loan-to-value ratio is more than 80% Federally insured mortgages repayment is guaranteed by either the Federal Housing Administration (FHA) or the Veterans Administration (VA)
Conventional mortgages are mortgages that are not federally insured Amortized mortgages have fixed principal and interest payments that fully pay off the mortgage by its maturity date fully amortized mortgage maturities are usually either 15 or 30 years Balloon payment mortgages require fixed monthly interest payments for 3 to 5 years whereupon full payment of the mortgage principal is due Note that balloon payment mortgages are riskier for homebuyers. Normally they will have to be refinanced, and the homeowner will not know the refinancing interest rate until the balloon is due, home prices may have fallen which could make it harder to refinance, and employment or health situations could have changed which also may make it more difficult to refinance. Balloon payment mortgages offer lower interest rates, but they are risky, and are usually used to encourage the homebuyer to buy more house than they can afford with a standard mortgage. … Not a good idea. Fixed-rate mortgages lock in the borrower’s interest rate required monthly payments are fixed over the life of the mortgage lenders assume interest rate risk Adjustable-rate mortgages (ARMs) tie the borrower’s interest rate to some market interest rate or interest rate index required monthly payments can change over the life of the mortgage, although they may initially be fixed for a set time period. For example, 5/1 ARMs and 3/1 ARMs are popular.

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