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Chapter 7-Mortgage MarketsMortgagesare loans to individuals or businesses to purchase homes, land, or other real propertyMany mortgages are securitizedMany mortgages are pooled and sold and then the mortgage payments are used to collateralize mortgage-backed securities (MBSs)Mortgages differ from bonds and stocksmortgages are backed by a specific piece of real propertyprimary mortgages have no set size or denominationcomparatively little information exists on mortgage borrowersPrimary Mortgage MarketFour basic types of mortgages are issued by financial institutionshome 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 condominiumscommercial mortgages are used to finance the purchase of real estate for business purposesfarm mortgages are used to finance the purchase of farmsMortgage CharacteristicsCollateral: lenders place liens against properties that prevent sale until loans are fully paid offA down paymentis a portion of the purchase price of the property a financial institutionrequires the borrower to pay up frontprivate mortgage insurance (PMI) is generally required when the loan-to-value ratio is more than 80%Federally insured mortgagesrepayment is guaranteed by either the Federal Housing Administration (FHA) or the Veterans Administration (VA)
Conventional mortgagesare mortgages that are notfederally insuredAmortized mortgages have fixed principal and interest payments that fully pay off the mortgage by its maturity datefully amortized mortgage maturities are usually either 15 or 30 yearsBalloon payment mortgagesrequire fixed monthly interest payments for 3 to 5 years whereupon full payment of the mortgage principal is dueNote 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 mortgageslock in the borrower’s interest raterequired monthly payments are fixed over the life of the mortgagelenders assume interest rate riskAdjustable-rate mortgages (ARMs) tie the borrower’s interest rate to some market interest rate or interest rate indexrequired 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.