econ423lec16 - 7/13/2009 The Plan for Today Homework Quiz...

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7/13/2009 1 MORTGAGE MARKETS JULY 13 TH , 2009 Lauren Heller Econ 423, Financial Markets The Plan for Today b Homework Quiz #5 b Mortgage Markets b Interest Rates and Discount Points b Loan Terms b Amortization b Types of Mortgages Recall from last time… b A Mortgage is… b A long-term loan secured by real estate b An amortized loan whereby a fixed payment pays both principal and interest each month. b As of 2006, the U.S. had over 13 trillion dollars of mortgage debt outstanding. History of Mortgages b Until post-WWII, most mortgage loans were short-term balloon loans. b Maturities of five years or less. b Typically, the lender renews the loan. b Problems during the depression b Lenders could not continue to extend credit. b As a part of the depression recovery program, the federal government assisted in creating the standard 30-year mortgage we know today. Residential Mortgage Characteristics b Mortgages can be roughly classified along the following three dimensions: 1. Mortgage Interest Rates 2. Loan Terms 3. Mortgage Loan Amortization Mortgage Interest Rates b The stated rate on a mortgage loan is generally determined by three factors: b Market Rates -General rates on Treasury bonds b Term -Longer-term mortgages have higher rates b Discount Points -Lower rates negotiated for cash up front b Mortgage rates are typically higher than Treasury rates – Why? b Increased risk b The spread between the two varies considerably.
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7/13/2009 2 Mortgage Interest Rates Discount Points b When should someone pay points up front in exchange for a lower interest rate on a mortgage?
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This note was uploaded on 08/31/2009 for the course ECON 423 taught by Professor Vd during the Summer '08 term at UNC.

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econ423lec16 - 7/13/2009 The Plan for Today Homework Quiz...

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