Products - Chapter 6

Question 1

Closed-End Mortgage

Answer 1

Loans whose term and maturity date cannot change. Closed-end mortgages have an established time at which the entire debt will be repaid. This means when the loan closes and the repayment period begins, the borrower and the lender know exactly when the loan will be repaid if the payment schedule is followed.

Question 2

Fixed Rate Mortgages

Answer 2

Fixed rate mortgages are mortgages in which the interest rate of the mortgage remains constant throughout the loan.

Question 3

Adjustable Rate Mortgages

Answer 3

A loan in which the interest rate can change over the term of the loan. Since the rate can change, ARMs are sometimes referred to as variable rate mortgages because their most obvious feature is the variance of rate.

Most ARMs function on a 30-year full amortization schedule.

Question 4

Traditional ARMs

Answer 4

Loans in which the rate adjusts on a periodic basis. Most traditional ARMs have an interest rate that adjusts each year, but at one time in history it was not unusual for the rate to change monthly.

Question 5

Hybrid ARMs

Answer 5

The most common adjustable rate mortgages available in the market today. The hybrid ARM combines features of a fixed rate mortgage and an adjustable rate mortgage. An example of a hybrid ARM is the 5/1. With a 5/1 ARM, in the first five years the loan’s interest rate remains fixed at the note (initial) rate. After the fifth year, the rate adjusts once annually. Common forms of hybrid ARMS include 3/1, 5/1, 7/1, and 10/1 (three, five, seven and ten-year set periods respectively).

Question 6

Option ARMs

Answer 6

The borrower has the option of three different payment amounts. One option allows for the borrower to make a fully amortized payment like any other ARM loan. The second option allows the borrower to make a flat payment amount that is only partially amortizing (the borrower does not make a full payment). This flat payment could result in negative amortization. A third option allows the borrower to make an interest-only payment in which only the monthly interest is paid.
With option ARMs, the interest-only and flat payment choices are only available for a limited period (usually the first 5 years of the loan term). After this period, the borrower is required to make a fully amortizing payment.

Question 7

How An ARM Adjusts

Answer 7

The factors that impact an ARM’s interest rate are the margin and the index

Question 8

Margin

Answer 8

The lender’s profit on the loan and an amount of interest that remains constant. Since the margin serves as the lender’s cut of the mortgage payment, the interest rate of an ARM can never go below the margin - regardless of market factors.

Question 9

Index

Answer 9

Makes the ARM’s rate change. It is an instrument that tracks the financial marketplace. If the market moves, so will the rate of the ARM. In today’s market the most commonly used indices are the London Interbank Offered Rate (LIBOR), United States Treasury Bill (T-Bill) and the Cost of Funds Index (COFI a.k.a The 11th District). The index that will be used to determine an ARM loan’s adjustment is included in the language of the mortgage contract and cannot be changed once the loan closes.

Question 10

Note Rate

Answer 10

(AKA initial rate) is the interest rate at the time of loan closing. The reason it is known as the note rate is because the initial rate is the one listed on the promissory note.

Question 11

Fully Indexed Rate

Answer 11

A combination of the margin plus the index. It is the interest rate of a mortgage provided there are no limits on how high or low the rate may go.

Question 12

Fully Indexed Rate Calculation

Answer 12

Margin + Index = Fully Indexed Rate

So if a lender’s profit margin was 2.5% and the current index was 3%, the fully indexed rate would be 5.5% (2.5% + 3% = 5.5%).

Question 13

CAPS

Answer 13

Caps are voluntary limits set by the lender when making the mortgage agreement, and if included, they are written as part of the mortgage contract.

Think of the cap as a ceiling or a floor that the ARM’s rate cannot exceed. If the fully indexed rate remains within the cap, then that’s the new rate. But if the fully indexed rate
exceeds the cap, the ARM’s new rate stops at the cap.

Question 14

Most common CAPS

Answer 14

Initial - first year rate cap

Annual (also known as periodic cap) - 2nd year and beyond cap per year

Lifetime - Over the life of the loan the rate may never change by more than _% from initial rate.

Question 15

Balloon Mortgages

Answer 15

Loans that require a planned full repayment of the balance prior to the end
of a 30-year amortization schedule

Question 16

Reset And Conditional Refinance

Answer 16

If the borrower is unable or unwilling to refinance or sell their home to avoid the large lump sum payment, they may have the option, through a conditional refinance provision, to convert the balloon mortgage to a fully amortizing mortgage at the maturity date. These reset options are not automatically built into every loan; they need to be agreed upon by the borrower and the lender and/or investor at loan application. Some loans do not contain a conditional refinance provision.

A balloon loan with a reset option is a 5/25 loan. The lump sum is due after 5 years while the reset amortizing term is 25 years. For the refinance of a loan with a reset option, no income or credit needs to be qualified.
The following provisions still must be met:
• The property must be the borrower’s primary residence.
• The resetting mortgage must be the only lien on the property.
• The borrower must have no late payments in the last 12 months.
• The borrower is still required to sign documents and pay closing costs.

Question 17

Graduated Payment Mortgages (GPM)

Answer 17

Products that allow the borrower to ease into a fully amortizing payment on the loan. Typically used by first-time home buyers, the GPM features monthly payment amounts that increase annually until they reach the full payment.

The gradually increasing payment period usually lasts for 5 - 10 years. During this time the payment does not fully amortize, and thus the remaining unpaid interest

for each payment is added to the principal balance of the loan - this result is called negative amortization, and it is an expected feature of the GPM.

Question 18

Open-End Mortgages

Answer 18

Open-end mortgages are loans in which the terms and maturity date can change. At the time open-end mortgages begin, there is no date when the loan commitment will end.

Common forms of open-end mortgages are the home equity line of credit (HELOC) and the reverse mortgage.

Question 19

HELOC

Answer 19

Home Equity Lines Of Credit:
A HELOC is a form of an open-end mortgage that allows the borrower to make repeated withdrawals and payments against the equity they have on their home.

Question 20

Reverse Mortgages

Answer 20

Mortgages are products designed for elderly borrowers - homeowners 62 years of age or older. Reverse mortgages were created with the idea that retirees who spent a lifetime building equity in their home shouldn’t be forced to sell the house when they can no longer afford to pay the monthly payment. Instead, a reverse mortgage allows the homeowner to tap their equity and use it to support a rate and term refinance of their current mortgage, take cash out or use the equity as a line of credit.

Question 21

Methods Of Equity Conversion

Answer 21

Lump Sum Cash Out
The borrower receives a one-time payment or transfer of existing principal loan balance at the time of closing.

Tenure And/Or Term Cash Out
The borrower receives a regular payment for the life of the loan (tenure) or over a set period of time (term).

Line Of Credit
The borrower receives a maximum credit limit at the time of closing which they may utilize in a similar fashion to a credit card.

Question 22

Single Purpose Reverse Mortgage

Answer 22

Single Purpose Reverse Mortgage: provided to the borrower for a specific need. Examples include paying property taxes or making needed repairs. It is often provided by a local government or non-profit agency, and is typically a fairly small amount.

Question 23

Proprietary Reverse Mortgage

Answer 23

Provided by a private lender.

Question 24

Home Equity Conversion Mortgage (FHA HECM)

Answer 24

Assumes the same standards as the proprietary reverse except that it is insured by the federal government and requires counseling on the part of the borrower prior to loan closing. The counseling helps explain how the reverse mortgage works to our borrower.

Question 25

Short Term Mortgages

Answer 25

Short term mortgages are also referred to as interim loans because their intent is to only be in place for a limited period of time. The most common form of interim loans are construction loans and bridge loans.

Characteristics: Short term mortgages are typically 12 months or less in length. They usually have higher interest rates because of their short repayment period and higher level of risk. Because they are used as a method of interim financing with no intent to reduce the principal balance, short term mortgages are interest-only in their payment type.

Question 26

Construction Loans

Answer 26

Construction loans are used to finance the construction of a new home or addition to a home. They finance the project based on the plans, materials, labor, and permit costs needed to complete the construction. Once the home is built, the borrower is expected to refinance or pay off the principal balance. Some construction loans are structured as a construction to permanent loan in which the balance from the construction loan is automatically rolled over into a more standard mortgage when a Certificate of Occupancy (C.O.) is received. Receipt of a C.O. is an indication that construction is completed and the home is available for residency.

Question 27

Bridge Loans

Answer 27

Bridge loans serve as temporary financing for a home buyer when purchasing a new home if they are still paying a mortgage on their current home. Bridge loans are usually available in two forms - secured and unsecured.
Secured bridge loans allow the lender to secure a lien interest in the borrower’s current home until it sells and the borrower can repay the lender.
A lender may allow for an unsecured bridge loan (meaning the lender is not taking out a security interest in the borrower’s current home) for the borrower on their new home if their current home is in process or under contract for sale with a buyer.

Question 28

Home Equity Loan (HEL)

Answer 28

A mortgage loan in which the borrower accesses their existing equity in the home. Unlike a HELOC where the
borrower uses their equity through a line of credit, the money for the HEL is provided in a lump
sum payment at closing from the lender to the borrower. This is often referred to as a cash out transaction because the borrower is literally taking cash out of their own equity value in the home.

Question 29

Piggyback Loan

Answer 29

The piggyback loan is a type of subordinate mortgage (higher interest rate) that provides a loan to cover the down payment. In the days prior to the financial crisis of 2008, this type of product was used frequently because it allowed the borrower to avoid private mortgage insurance on their mortgage.

Question 30

80/20 Piggyback Loan

Answer 30

When the primary mortgage covered 80% of the home’s purchase price, while the piggyback loan covered 20% of the price.

Question 31

80/10/10 Piggyback Loan

Answer 31

When the 80, once again, covered 80% of the home’s purchase price, and another loan is provided for 10% of the purchase price.
The final 10% would be provided by the borrower
as a down payment

Question 32

Sub-Prime Mortgages

Answer 32

Sub-prime mortgages are a type of loan intended for borrowers with less than prime qualifications. Typically factors such as lower income, poor or limited credit history, and minimal assets can lead to a borrower receiving a sub-prime loan. Because of the borrower’s circumstances, these loans carry a higher level of risk and therefore lenders will charge a higher rate of interest to offset the risk.

Question 33

Jumbo Mortgages

Answer 33

Jumbo mortgages are a type of loan where the dollar amount of the mortgage exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA). This loan is considered riskier than normal because of the high dollar amount. The lender will have greater exposure to risk should the borrower default. To protect against this risk, the lender will usually require higher credit scores and a higher level of income compared to the borrower’s monthly debt (debt-to-income ratio).

Question 34

Niche Loans

Answer 34

Niche loans are for unique circumstances or needs. This loan is typically unavailable through major lenders and usually requires higher rates of interest for the borrower. An Alt-A mortgage loan is an example of a niche loan.

Question 35

Alternative A-Paper (Alt-A) Mortgages

Answer 35

A-Paper mortgages are a type of loan intended for borrowers who have good credit but don’t meet other underwriting criteria for conforming prime loans. Borrower shortcomings such as high loan-to-value and debt- to-income ratios or limited documentation of the borrower’s income make this loan higher risk and may require higher interest rates.

Question 36

Subordinate Liens

Answer 36

A unique loan type that is lower in rank or position to another loan that takes priority in rank of payoff.

Question 37

Interest-Only Loans

Answer 37

Loans for which the borrower is only required to pay the interest portion of their payment. By only paying the interest on the loan, the principal balance is never reduced.

Question 38

Reduced Documentation Loans

Answer 38

These loans allowed borrowers to apply for and receive mortgage loans without full documentation to support their application.