Mortgage-backed Securites - Mortgages Multi-year secured...

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1 Mortgage-Backed Securities 1 Mortgages Multi-year secured loans to individuals or businesses to purchase a home, land, or other real property 2 The lender has the right to sell the collateral (i.e. property) if the borrower fails to make the required payments The lender assesses credit quality through the loan-to-value ratio (LTV), the expected appreciation of the asset, and the borrower’s debt-to-income ratio (DTI) Mortgages Mortgages are normally amortized loans Formula: PV = PMT x PVIFA(r,n) Each monthly payment consists of both 3 Each monthly payment consists of both principal and interest and the mortgage is fully paid off by its maturity date Outstanding loan amount declines with accelerating speed as time proceeds • The monthly payment is mostly interest at first and is mostly principal toward end of loan term Mortgage Prepayment Mortgages may be prepaid for the remaining loan balance at any time at the option of the borrower 4 Reasons for prepayment: refinancing at lower interest rate, reduction of overall debt loads, or sale of property due to relocation Prepayment fee/penalty: a charge associated with liquidation of the loan during the beginning years of the mortgage Fixed-Rate Mortgages Locks in the borrower’s interest rate and thus the required monthly payment over the life of the mortgage, regardless of market rate changes 5 Preferred by mortgage borrowers especially when interest rates in the economy are low and expected to rise in the near future Adjustable-Rate Mortgages The contractual interest rate is tied to some interest rate index/benchmark Periodical adjustment is required to reflect change in the reference 6 Lenders have low exposure to interest rate risk and borrowers may pay less interest over the
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