L-13.IBFS.CA - CA(IBFS L-13 Mortgages This lesson deals...

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CA (IBFS) L-13: Mortgages This lesson deals with: 1. Def. of Mortgages 2. Classification of Mortgages 3. Traditional Mortgages 4. Non-Traditional Mortgages 1. Def. of Mortgages: Mortgage is the pledge of property (real estate) to secure the payment of a debt. If the borrower (Mortgager or property owner) fails to pay the lender (Mortgagee), the lender can foreclose the loan, seize the property and sell the property to realize his dues. Important aspects of mortgages: Lender has to examine the creditworthiness of the borrower by obtaining information on, ‘details of the amounts outstanding on any other loans taken by the borrower and details of monthly/annual income of the borrower from all sources as well as his net worth’. Two basic rules to assess the mortgager are: (i) Mortgagee’s payment shall not exceed 25% of borrower’s total income less obligations. (ii) Total mortgage payments plus other housing expenses should not exceed 33% of the borrower’s total income less all payments owed for other obligations. Loan to value (LTV) ratio indicates the down payment to be made shall be 20% to 25%. 2. Classification of Mortgages: Mortgages are classified into: (i) Traditional : In this the interest is charged on the loan for the entire term and the loan is to be repaid in equated monthly installments containing both principal and interest components. (ii) Non-traditional : They are also called Alternative Mortgage Instruments (AMIs). They do not have monthly installments and the repayment structure would be different. 3. Traditional Mortgages: 1
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They exhibit the following features: Fixed rate of interest is charged for entire term of the loan Loan is repaid in equal monthly installment (Both principal and interest). At first, payments are only interest during the initial moratorium period. As the principal outstanding declines due to repayment, the interest portion also declines and the principal portion increases. If a 30 year (360 months) traditional mortgage is considered at 10% interest rate, for a loan of Rs.100,000, each month the interest payment is 1/12 of 10% of the mortgage balance at the end of the previous month. The principal payment is the total payment less interest. Total payment is the equated monthly payment calculated as Rs.100,000/PVIFA (10/12, 360) . Example: Consider a 30 year (360 months) term 10% (interest) Traditional Mortgage (TM) for a loan of Rs.100,000. The monthly payments and the break-down between principal and interest would be as follows:- Month Mortgage amount outstanding at the end of month (Rs.) Total monthly installment Interest Principal 0 100, 000 1 99,955.73 877.57
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L-13.IBFS.CA - CA(IBFS L-13 Mortgages This lesson deals...

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