4 - Fixed Rate Mortgage - ch. 4

ucla | MGMT 170 | 2023-04-10T10:55

Table of Contents

Definitions

  • point
    • a 1% charge on a loan - usually used to collect payment up front
  • monthly payments (PMT)
    • usually pay monthly interest + some principal (amortization)
  • arm
    • adjustable rate mortgage
  • debt service constant
    • rate of payment - interest + amortization rates
    • when debt service constant = interest → interest only loan → PV = FV = loan amount
  • CPM
    • constant payment loan - pay
  • annuity
    • a guaranteed payment to you - accumulates over time
  • free and clear
    • free and clear of debt
    • promissory note fulfilled
    • security instrument (deed of trust/mortgage) extinuished

Big Ideas

Lecture

  • Capital Markets
    • financial and securities markets - includes mortgage market
  • loan availability
    • supply/cost of mortgage funds - affected by economic growth (global, national, local), expected Inflation, and other Risks
  • lenders as intermediaries
    • most real estate lenders (mortgage providers, banks) sell their loans into the secondary mortgage market instead of holding loans to maturity
  • loan pricing
    • interest rate, fees, points and costs charged by lender, and loan terms (e.g. prepayment penalties)
  • real interest rate
    • nominal/contract interest rate MINUS expected inflation
  • risk adjusted return
    • expected return relative to expected risk
  • amortization
    • process of repaying the loan (principal) balance over time
  • balloon payment
    • principal balance due on the maturity date
  • pay rate vs. accrual rate
    • pay rate is true monthly payment made by a Borrower against the loan ≥ accrued interest due on the loan
  • constant payment mortgage (CPM)
    • when monthly payments are constant - loan is fully/partially/negative amortizing, or interest only
  • constant amortizing mortgage (CAM)
    • when each monthly payment has constant amortization (principal payment) → monthly payment and interest accrued are decreasing → you pay less interest overall than CPM
  • reverse annuity mortgage (RAM)
    • lender sends fixed monthly checks to borrower who pays back accumulated principal and accrued interest
    • targeted at seniors who have paid off their loans but cannot stay/afford to stay in the home → allows borrowers/owners to convert equity into periodic income/cash
    • the loan is to be repaid when the house is old, the borrower dies, or by heirs
  • loan fees and costs
    • origination fees (for loan writing and processing), appraisal and credit report
    • loan fees and points increase the lender’s yield (return)
  • annual percentage rate (APR)
    • discloses effects of loan fee, points, and costs on residential loans (assuming held to maturity)
  • truth-in-lending act
    • fred regulation Z requires lenders to include all fees, points, costs in APR (NOT prepayment penalties)
  • prepayment penalties
    • increase the effective yield to lender - subject to negotiation, not reflected in APR
  • effective annual interest rate
    • calculation that considers all loan fees, points, costs, and any prepayment penalties actually paid
    • → only affected by time the loan is held until (full) repayment

Resources

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