16 - Mortgages Laws and Contracts Flashcards
(42 cards)
What are the two main contracts in a mortgage loan?
The Note and the Mortgage.
What does the Note contract do?
Defines the terms & conditions of the loan (e.g., how much to be paid, and when).
What does the Mortgage contract do?
Grants the lender a security interest (lien) in the mortgaged property.
List the five common elements found in most mortgage notes.
- Payment Structure & Term
- Interest Rate & Charges
- Prepayment Rights & Penalties
- Late Fees
- Personal Liability
Why is Personal Liability included as a component of the Note?
To establish the borrower’s obligation to repay the debt in their personal capacity, beyond just the property collateral.
What does Term refer to in a mortgage note?
The timeframe of the loan—from origination to when it must be paid in full.
What are the most common mortgage terms in the U.S.?
30-year and 15-year terms.
Historically, many shorter terms
have been used in practice
What does Payment Structure refer to?
The schedule of when loan payments are made (typically monthly).
- Most standard mortgages feature monthly payments.
– Most are full-amortized, but there are exceptions.
What does it mean for most mortgages to be “full-amortized”?
That scheduled payments fully retire the loan balance by maturity.
What characterizes a fully-amortized loan’s payment pattern?
Payments are (approximately) the same in every period.
How does the composition of each payment shift over time in a fully-amortized loan?
Early payments are mostly interest; later payments are mostly principal.
principal is the amount you actually borrowed and still owe back— the outstanding balance of the debt itself, not including interest or fees.
When you first take out a mortgage, the full loan amount is the starting principal.
Each payment is split into two parts:
Interest portion – the charge the lender earns for letting you use their money.
Principal portion – the amount that is applied directly to reduce the remaining loan balance.
Early in a fully-amortizing loan, most of the payment goes toward interest because the principal balance is still large, so interest (calculated on that balance) is high.
As the principal shrinks over time, the interest calculated each period falls, allowing a larger share of every payment to go toward knocking down the principal faster.
So “principal” is simply the core debt— the money you must eventually pay back in full, separate from the cost (interest) of borrowing it.
What is an interest-only (non-amortizing) loan?
A loan where only interest is paid during the term; the entire principal is due at maturity.
The maturity of a loan is the scheduled end-date of the loan’s term—the point at which all remaining amounts you owe (principal + any unpaid interest or fees) must be fully repaid.
For a fully-amortizing mortgage, maturity is when the last regular payment brings the principal balance to $0.
For an interest-only or balloon loan, maturity is when the entire outstanding principal (the balloon) is due in one lump sum.
The length of time from origination to this end-date is the loan’s term (e.g., a 30-year maturity).
When does the borrower pay down principal in an interest-only loan?
In a single lump sum at maturity.
What is a partially amortized loan?
A hybrid: payments cover some principal & interest, but leave a remaining “balloon” principal due at maturity.
How does a partially amortized loan sit between a fully-amortized and an interest-only loan?
It amortizes more than interest-only but less than a fully-amortized loan, resulting in a smaller balloon payment at maturity.
What defines a negative amortization loan?
Early payments are so small they don’t even cover interest; unpaid interest is added to principal.
What happens to the loan balance under negative amortization?
The outstanding principal increases over time until paid off at maturity.
What are the two broad categories of mortgage interest rates?
Fixed-rate mortgages (FRMs) and adjustable-rate mortgages (ARMs) (sometimes called variable-rate mortgages).
How are mortgage interest rates expressed and converted to a monthly charge?
Rates are always quoted annually. A 6% APR becomes 6% ÷ 12 = 0.5% interest each month.
To what is an ARM’s rate typically tied?
A public index (e.g. U.S. Treasury constant-maturity rate or LIBOR) plus a fixed margin.
What is the “margin” on an adjustable-rate mortgage?
The preset spread over the index rate (e.g. “Prime + 0.6%”).
In an adjustable-rate mortgage (ARM) the “preset spread” (also called the margin) is the fixed number of percentage points that the lender permanently adds to whatever reference index the loan follows.
Index – a published, market-based rate that can move up or down (e.g., 30-day SOFR, 1-year Treasury, Prime).
Preset spread / margin – a constant add-on, stated in the loan contract on day 1 and never changes (e.g., + 0.60 percentage points).
If ARMs carry the risk of payment increases, why might a borrower still choose one?
Initial ARM rates are typically lower than FRM rates, so borrowers save early on.
What mortgage type is especially popular in the U.S.?
True fixed-rate mortgages (FRMs), because they lock in payment stability.
Outside the U.S. true FRMs are much
less common.
What is a hybrid ARM?
A loan with a fixed rate for a set initial period (e.g. 5 years) that then adjusts thereafter.
Hybrid ARMs are more common,
where rate is fixed for several years,
then variable afterwards
