ch 9 - Chapter 9 Mortgage Markets . 1 Background on...

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1 Chapter 9 Mortgage Markets .
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2 Background on Mortgages A mortgage is a form of debt that finances investment in property Financial institutions such as savings institutions and mortgage companies originate mortgages The level of mortgage debt has risen over time The majority of mortgage debt outstanding is on one- to four-family properties
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3 Residential Mortgage Characteristics The mortgage contract should specify: Whether the mortgage is federally insured The amount of the loan Whether the interest rate is fixed or adjustable The interest rate to be charged The maturity Other special provisions
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4 Residential Mortgage Characteristics Insured versus conventional mortgages Federally insured mortgages guarantee loan repayment to the lending financial institution Conventional mortgages can be privately insured Fixed-rate versus adjustable-rate mortgages A fixed-rate mortgage locks in the borrower’s interest rate over the life of the mortgage An adjustable-rate mortgage (ARM) allows the mortgage rate to adjust to market conditions
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5 Fixed-rate versus adjustable-rate mortgages
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6 Residential Mortgage Characteristics A balloon-payment mortgage requires interest payments for a three- to five-year period when the borrower must pay the full amount of the principal No principal payments are made until maturity, so monthly payments are lower Amortizing mortgages An amortization schedule shows the monthly payments broken down into principal and interest
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7 Mortgage Amortization Schedule
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8 Example Consider a 15-year (180-month) $200,000 mortgage at an annual interest rate of 9 percent. Develop an amortization schedule for this mortgage showing. Show the first three payments and the last two payments on the schedule.
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9 Example Step 1: Calculate the monthly payment 53 . 028 , 2 % 75 . 12 / 9 / 180 ) 12 ( 15 000 , 200 = = = = = = PMT y i N PV
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ch 9 - Chapter 9 Mortgage Markets . 1 Background on...

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