Chapter09 - Chapter 9 Mortgage Markets Unique Nature of...

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Chapter – 9 Mortgage Markets
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Unique Nature of Mortgage Markets Mortgage loans are secured by the pledge of real property as collateral Mortgage loans are made for various amounts – no standard denominations Issuers (borrowers) are usually small, relatively unknown financial entities (individuals, families, businesses) Weaker secondary market than stocks and bonds Mortgage markets are highly regulated and supported by federal government policies
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TYPES OF MORTGAGES 1. Fixed rate mortgages Lender takes lien on property collateral Borrower makes periodic payments Interest is usually computed on declining balance Payments amortized over time Each payment includes interest and principal When mortgage is fully paid, the lien is removed and the borrower obtains a clear title to the property
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$ 180,000 Purchase Price of House $ 36,000 20% Down Payment $ 144,000 Mortgage Example : 15 yr Mortgage 5.5 % annual interest rate Monthly i = 5.5/12 = 0.4583 % # of payments = 180 PV = 144,000 i = 0.4583 n = 180 FV = 0 Cpt PMT PMT = $ 1,176.57 30 yr Mortgage 6 % annual interest rate Monthly i = 6/12 = 0.5 % # of payments = 360 PV = 144,000 i = 0.5 n = 360 FV = 0 Cpt PMT PMT = $ 863.35
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AMORTIZATION SCHEDULE 2nd AMORT PV P1 = 1 enter ; arrow down P2 = 1 enter ; arrow down
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15 yr Mortgage 1 st month BAL = 143,483.38 PRN = 516.62 INT = 659.95 30 yr Mortgage 1 st month BAL = 143,856.65 PRN = 143.35 INT = 720.00 Halfway through the loan 15 yr Mortgage P1 = 90 P2 = 90 BAL = 86,609.40 PRN = 776.08 INT = 400.49 30 yr Mortgage P1 = 180 P2 = 180 BAL = 102,310.34 PRN = 350.05 INT = 513.30 How much interest is paid over life of loan? 15 yr Mortgage P1 = 1 P2 = 180 BAL = 0 PRN = 144,000 INT = 67,782.53 30 yr Mortgage P1 = 1 P2 = 360 BAL = 0 PRN = 144,000 INT = 166,806.96
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2. ADJUSTABLE RATE MORTGAGE (ARM) Borrowers’ costs vary with inflation and interest rate levels Lenders shift interest rate risk to the borrower (at least partially) Rate may vary in a prescribed range (caps) or without limit
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Chapter09 - Chapter 9 Mortgage Markets Unique Nature of...

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