Chapter 14 - Types of Financing

Question 1

Variable Rate Mortgage

Answer 1

Interest rate could be adjusted by lender during the 30 year life of the loan to reflect the rise and fall of interest rates paid to savers and lenders

Question 2

Adjustable Rate Mortgage (ARM)

Answer 2

A mortgage on which interest rate rises and falls with changes in prevailing interest rates

Question 3

ARM Main Requirement

Answer 3

Interest rate must be tied to some publicly available index that is acceptable by both borrower and lender.

Question 4

ARM Benefit to Borrower

Answer 4

• ARMs carry an initial interest rate that is lower than the rate on a fixed rate mortgage
• If market interest rates fall, borrowers monthly payment will fall

Question 5

ARM Disadvantage to Borrower

Answer 5

If market rates rise, borrower will pay more

Question 6

Index Rate

Answer 6

Most popular is the one year maturity treasury - Published by Federal Reserve based on daily calculations

Question 7

Margin

Answer 7

The amount added to the index rate that reflects the lenders cost of doing business
- 2-3%
- Stays constant

Question 8

Adjustment Period

Answer 8

Amount of time the elapses between adjustments - Commonly one year
- When rates are rising, longer adjustment periods benefit the borrower

Question 9

Interest Rate Cap

Answer 9

• Lenders are required to disclose
• How much the interest rate can increase for any one adjustment period
• Most popular is 1-2%

Question 10

Payment Cap

Answer 10

Sets limit on how much the borrower’s monthly payment can increase in any one year
- Most popular is 7.5%

Question 11

Negative Amortization

Answer 11

Accrual of interest on a loan balance so that, as loan payments are made, the loan balance rises
- Set limit of 125% of original loan balance

Question 12

Graduated Payment Mortgage

Answer 12

Mortgage with and interest rate and maturity that are fixed, but the monthly payments gradually rise, because the initial monthly payments are insufficient to fully amortize the loan
- Common during periods of high inflation

Question 13

Equity Sharing

Answer 13

An arrangement whereby a party providing financing gets a portion of owners profits

Question 14

Shared Appreciation Mortgage (SAM)

Answer 14

• Offers interest rates of 1-2% below market value
• Lender earns about half the increase in appreciation over the term of the loan

Question 15

Package Mortgage

Answer 15

A mortgage that secures personal AND real property
- Borrower can finance major appliances at the same rate as the real estate

Question 16

Blanket Mortgage

Answer 16

A mortgage secured by 2 or more properties

Question 17

Reverse Mortgage

Answer 17

• Must be 62 to qualify.
  Payments made to home owner by lender either in one lump sum (Reverse Annuity Mortgage - RAM) or in monthly payments
  Lender is repaid after home owner dies or property is sold

Question 18

Construction Loan - aka Interim Loan

Answer 18

Short term loan for new construction or remodeling of an existing structure

Question 19

Blended-Rate Loan

Answer 19

A refinancing plan that combines the interest rate on exiting mortgage loan with current rates

Question 20

Equity Mortgage

Answer 20

• Lender agrees to make a loan based on the amount of equity in a borrowers home
• Max loan is 70-80% of homes value minus any first mortgage or other liens against the property

Question 21

Affordable Housing Loan

Answer 21

• Low income = No more than 80% of median income for area
• Moderate income = No more than 115% of median income for area

Question 22

Seller Financing

Answer 22

A note accepted by a seller instead of cash

Question 23

Wraparound Mortgage

Answer 23

A mortgage that encompasses any existing mortgages and its subordinate to them

Question 24

Subordination

Answer 24

Voluntary acceptance of a lower mortgage priority than one would other wise be entitled to

Question 25

Option

Answer 25

A right for a given period of time to by, sell or lease the property at a specified price and terms

Question 26

The purpose of an ARM is to more closely match what the lender received in interest to

Answer 26

The yield available from other types of investments

Question 27

A borrower is considering an ARM mortgage from the first lender at a 2% margin and a comparable loan from a second lender at a 3% margin. The loan from the first lender would result in

Answer 27

Lower loan payments

Question 28

ARM mortgages with teaser rates are avoided by mortgage insurers because

Answer 28

They can lead to early foreclosure when the rates are increased

Question 29

Jeff has a blanket mortgage, can he sell one of the properties?

Answer 29

If the mortgage contained a partial release clause, it would be possible to sell a property before the entire mortgage debt was repaid.

Question 30

A woman is building a new home and has secured a construction loan from her local bank. When the house is finished, she plans to pay off the construction loan with a permanent loan from a savings and loan association. Will the permanent loan be a take-out loan?

Answer 30

Yes. A take-out loan is secured from another lender to pay off a construction loan. Construction loans are considered high risk and usually cost a higher interest rate than the less risky permanent loan

Question 31

A corporation build a building to its exact specifications. It wants to pull out its capital to use for other purposes. The best financing option is the

Answer 31

Sale and leaseback. The owner occupant sells his property in a sale leaseback and then remains as the tenant

Question 32

A couple own their home which is presently worth approximately $150,000. They have an existing fixed rate mortgage of $50,000 on their property. To help pay for their child's college expenses, they have arranged for an equity loan on the home. How is the interests rate determined?

Answer 32

The interest rate will probably be based on the prime rate plus the lender's margin of 1-3%

Question 33

When would a wraparound mortgage be discouraged?

Answer 33

Wraparound mortgages cannot be used if there is a due-on-sale clause.

Question 34

A sale may be made and financed under a contract for deed

Answer 34

By combining wraparound financing with an existing mortgage on the property, provided the existing mortgage does not contain a due-on-sale clause. It is not necessary for the property to be owned free and clear. Contract for deed may be used on any property type and the seller can approve the buyer without following any guidelines

Question 35

Possession without the need to immediately finance the full purchase price of a property can be achieved by using a

Answer 35

Lease with option to buy. This eliminates the need for immediate financing of the full purchase price of the property.

Question 36

A graduated payment mortgage is appealing to which group of buyers?

Answer 36

Young professionals. They are more likely to see increases in their incomes so that they can more easily afford the increasing payment

Question 37

One major disadvantage to the borrower of an ARM is

Answer 37

Possible negative amortization