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Unformatted text preview: ey simply endure a one–time adjustment to the interest rate. CHARACTERISTICS OF TWO–STEP MORTGAGE
A fixed rate of interest is charged for the initial period, usually seven is based on 30–year payment schedules. An automatic conversion following the initial period may be another fixed rate years, that is lower than the standard for 30–year, fixed rate loans. Amortization at the then prevailing rate. It could be adjustable but with a lifetime interest ceiling set at the time of the loan, at no additional cost. The conversion feature assures the borrower that the otherwise large balloon due in seven years will come from the same lender, only at a different rate. Stated differently, the two–step guarantees fixed rate financing for the entire loan term without having to come up with a sizable balloon payment. Because they qualify for purchase by FNMA in the secondary market (discussed in earlier chapter), loan amounts vary according to the current limits set by FNMA. Dynasty School (www.dynastySchool.com) 9-51 REAL ESTATE FINANCE BIWEEKLY FIXED RATE LOANS
????Biweekly fixed rate loans shorten the life of the loan because the principal is decreased faster. Borrowers make 26 payments per year rather than 12 payments per year. Making a payment every two weeks means that the payment is applied to decrease the unpaid balance on the loan every two weeks. Since interest can only be charged on the unpaid interest due, then the remaining amount directly reduces the principal. How much faster is a loan paid off using biweekly instead of monthly payments? A rule of thumb is that it is one–third faster–a traditional 30–year monthly amortized loan can be paid off in about 21 years using biweekly payments. Certain facilitating companies can set up this procedure for you, with fees in the range of $500.00 if your lender does not provide the opportunity. Biweekly payment programs are approved by Fannie Mae and Freddie Mac; thus there is a secondary market for these loans. Some borrowers prefer the biweekly, as opposed to the traditional monthly, payment loans...
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This note was uploaded on 12/30/2010 for the course SOC 101 taught by Professor Zhung during the Spring '10 term at Punjab Engineering College.
- Spring '10