Ch. 18 Mortgage Mechanics
This chapter has mostly calculation questions. 36% of all questions will come from this
chapter.
What is the difference between an interest-only vs. amortized loan? - Interest-only loan:
bo
...
Ch. 18 Mortgage Mechanics
This chapter has mostly calculation questions. 36% of all questions will come from this
chapter.
What is the difference between an interest-only vs. amortized loan? - Interest-only loan:
borrower makes periodic payments of interest, then pays loan balance in full at end of the loan
Amortized loan: the borrower makes periodic payments of both interest and principal - loan
balance declines gradually over the life of the loan
What is a negative amortization loan? - In a “negative” amortization loan, the amount
outstanding increases over the life of the loan Is it considered safe? - no
In an amortized loan, what happens to the interest and principal parts of the payment
over time? - The interest portion of each payment decreases over time
The principal portion of each payment increases over time
Principal payment DOES NOT decrease over time.
In a “fully” amortized loan, amount outstanding reduces to 0 at the end of the loan
What are points? - Points = fees
Lenders often charge discount points (%) and/or origination fees ($) to increase their profit on
mortgage loans and/or to decrease the interest rate.
One discount point = 1% of loan amount
What is the difference between a fixed rate and variable rate loan and why do the rates
for the two typically differ? Two-step mortgages: loans in which the interest rate is adjusted
to a market index rate at the end of the 5th or 7th year. Rate adjusted once over life of loan
Adjustable rate mortgages (ARM): loans in which the interest rate is adjusted at the end of each
year to a market index rate.
Be able to calculate the 4
th missing variable in a loan calculation.
Q: A buyer can afford no more than $500 per month in payments. The most favorable
loan available in the market is a 30 year, monthly payment loan at 10% APR. What is
the maximum affordable house with a 10% down payment?
value ratio is 90%, or .9. This means loan divided by value = .9. Solve this formula for
the “Value”. L/V = .9, V = L/.9 56,975.41/.9 = 63,306
Q: A lender makes a $90,000 mortgage at 9% interest with monthly payments for 25
years. How much principal will be repaid during the fourth year of the loan?
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