Chapter 6 Basic Features of a Residential Loan

I if lender didnt renew loan balloon payment required

This preview shows page 14 - 29 out of 91 pages.

I If lender didn’t renew loan, balloon payment required. Now 30 years is standard repayment period.
Image of page 14

Subscribe to view the full document.

Repayment Period Until 1930s, typical repayment period for mortgage loan was 5 years. I If lender didn’t renew loan, balloon payment required. Now 30 years is standard repayment period. 15-year, 20-year, and 40-year loans also available.
Image of page 15
Repayment Period Length of repayment period affects: 1. amount of monthly payment, and 2. total amount of interest paid over life of loan. May also affect interest rate charged.
Image of page 16

Subscribe to view the full document.

Repayment Period Longer repayment period reduces amount of monthly payment. I Makes 30-year loan more affordable than 15-year loan. Monthly payment amount
Image of page 17
Repayment Period Shorter repayment period: I higher payment amount I equity builds faster I more difficult to qualify for Monthly payment amount
Image of page 18

Subscribe to view the full document.

Repayment Period Shorter repayment period substantially decreases total amount of interest paid on loan. Total interest for a 15-year loan is less than half the total interest for a 30-year loan. Total interest
Image of page 19
Repayment Period Lenders generally charge lower interest rates for shorter-term loans. Interest rate
Image of page 20

Subscribe to view the full document.

Repayment Period Advantages of 15-year loan: lower interest rate total interest much less clear ownership in half the time Disadvantages of 15-year loan: higher monthly payments tax deduction lost sooner 15-year loan compared to 30-year loan
Image of page 21
Repayment Period 20-year loan is compromise between 15-year loan and 30-year loan. I Monthly payments higher than payments for 30-year loan. I But not as high as payments for 15-year loan. 20-year loans
Image of page 22

Subscribe to view the full document.

Repayment Period Some lenders offer 40-year loans, but they aren’t common. I Monthly payments even more affordable than payments for 30-year loan. I But equity builds even more slowly and borrower pays even more total interest. I Most likely to be used in areas with very high housing costs. 40-year loans
Image of page 23
Summary Amortization and Repayment Period i Amortization i Fully amortized i Partially amortized i Balloon payment i Interest-only loan i Loan term i 30-year loan i 15-year loan i 20-year loan i 40-year loan
Image of page 24

Subscribe to view the full document.

Loan-to-Value Ratio Loan-to-value ratio (LTV) expresses relationship between loan amount and value of home being purchased.
Image of page 25
Loan-to-Value Ratio Loan-to-value ratio (LTV) expresses relationship between loan amount and value of home being purchased. For example, if LTV is 80%, loan amount is 80% of sales price or appraised value, whichever is less.
Image of page 26

Subscribe to view the full document.

Loan-to-Value Ratio Loan-to-value ratio (LTV) expresses relationship between loan amount and value of home being purchased. For example, if LTV is 80%, loan amount is 80% of sales price or appraised value, whichever is less. The higher the LTV, the smaller the downpayment.
Image of page 27
Loan-to-Value Ratio Because downpayment is smaller, loan with higher LTV is generally riskier than loan with lower LTV.
Image of page 28

Subscribe to view the full document.

Image of page 29
  • Spring '10
  • N/A
  • Interest, Mortgage loan

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern