Chapter 9 - Intro To Mortgage Finance Flashcards Preview

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Flashcards in Chapter 9 - Intro To Mortgage Finance Deck (21)
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1
Q

Define diversification?

Diversification is the process of investing funds in more than one project or industry in order to reduce the risk of unexpected losses.

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2
Q

What is a balloon payment?

A balloon payment includes any payment of principal over and above the regular payment.

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3
Q

Incurring an obligation to repay a debt in order to invest or consume more than one currently owns is known as __________ ___________.

Incurring an obligation to repay a debt in order to invest or consume more than one currently owns is known as DEBT FINANCING.

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4
Q

Define compound interest.

Compound Interest is:

  • Interest which, during life of the loan, is charged or calculated at regular intervals and if not immediately paid ( as in an interest only loan) will, in subsequent periods, earn interest itself (as in an interest accruing loan).
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5
Q

What is the difference between fully amortized and partially amortized mortgages.

Fully Amortized - loan is completely repaid by payments made over entire amortization period.

Partially Amortized - loan term is shorter than amortization period, and an outstanding balance exists at the end of the term.

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6
Q

Describe how a constant payment loan works?

A constant payment loan is a loan which is repaid by equal and consecutive instalments that include both principal and interest.

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7
Q

List 3 major sources of mortgage funds

1) Institutional lenders like banks
2) private individuals or lenders
3) government

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8
Q

What is amortization

Amortization is the process of paying off a loan by periodic payments of blended principal and interest.

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9
Q

The number of times compound interest is charged or calculated per year ( for example, semi annual or monthly), is referred to as the _________ _________.

Compounding Frequency

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10
Q

What is the difference between interest only loan and interest accruing loan.

Interest Only
- loan is repaid with interest-only payments until the end of the loan term when the full principal and last interest payment is made.

Interest Accruing Loan
- requires a single payment of principal and accumulated interest at the end of the loan term.

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11
Q

Interest Accruing Loan - Zero Payment Rule

Enter 0 in FV and PMT
If monthly payments then Enter 12 in P/YR
Enter number of months in N.

Enter FV to get amount outstanding Principle plus Interest.

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12
Q

I/YR if daily interest given what you should do? Investor borrowed 1,000 at daily interest rate of .0675 (compounded daily) for 1 year. What will he owe at end of 1 year and no payments made.

.0675 is periodic rate which means you need to multiply by 365 = 24.637500 nominal rate. I/yr 24.637500. /. P/yr is 365 N is 365. PV is 1,000. Answer is FV = 1279.27

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13
Q

Periodic Interest Rate

Sometimes the problem will give Periodic interest rate especially in Interest Accruing problems or I/yr problem

If daily then multiply by 365 to get Annual Nominal rate

If Semi Annual then multiply by 2 to get Annual Nominal Rate

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14
Q

If loan is only interest only Payments like Line of Credit. What enter in PV and FV?

PV is loan Amount in Positive
FV is loan Amount in Negative

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15
Q

If loan is only interest only Payments like Line of Credit. What to enter in the N if number of years for the loan is not given?

You can enter 1 or any number. It does not matter. The answer will the interest payment monthly or whatever P/yr PMTs per year was entered

Remember, it does not matter how long the loan is for, if you enter just 1 you will get right answer.

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16
Q

Find N after entering all info
Ex/ how long will it take to fully amortize the loan.

When you press N you will get what you entered in P/yr. if it is month payments then this answer will be months.

If you entered 4 in Quarters. The answer will be quarters. To get years multiply by 3 will give you total number of months then x 12 to get years.

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17
Q

What is:
EFFECTIVE INTEREST RATE?
Per Year
Per annum

Effective annual interest, or Per Annum or Per Year is
It is:

J1 Annual Rate.

All means same thing

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18
Q

Nominal means:

J ( Annual)

J1 = effective annual interest rate. Eff

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19
Q

If you are given anything other than years in the question. Ex 24 months. 4 quarters.

You enter exactly this number into N. make sure you P/YR is in months or quarters

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20
Q

5 Cs of CREDIT

CHARACTER - will borrower repay the loan. It’s a subjective opinion based on application information

Capital — how much the borrower will invest. — Amount of DOWNPAYMENT

Capacity — can borrower repay. — use lending constraints

CREDIT — Credit History / repayment history— Review credit report

Collateral— what is used for loan security — real property

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21
Q

Stress Test

Greater of contract rate plus 2.% or Bank of Canada rate.

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