Flashcards in unit 14 - part 3 Deck (6):
A straight loan (also known as a termloan or interest-only loan) essentially divides the loan into two amounts to be paid off separately. The borrower makes periodic payments of interest only, followed by the payment of the principal in full at the end of the term.
now generally used for home improvements and second mortgages rather than for residential first mortgage loans.
Unlike a straight loan payment, each payment in an amortized loan partially pays off both principal and interest. Most mortgage and deed of trust loans are amortized loans.
Adjustable-Rate Mortgage (ARM)
The adjustable-rate mortgage (ARM) begins at one rate of interest, then fluctuates up or down during the loan term, based on a specified economic indicator. Because the interest rate may change, the mortgagor's loan payment may change. Details of how and when the interest rate will change are included in the note.
A growing-equity mortgage is also called a rapid-payoff mortgage. The growing-equity mortgage uses a fixed interest rate, but payments of principal are increased according to an index or schedule. The total payment thus increases, and the loan is paid off more quickly. A growing-equity mortgage is most frequently used when the borrower's income is expected to keep pace with the increasing loan payments.
Balloon Payment Loan
When the periodic payments on a loan are not enough to fully pay off the principal of the loan by the time the final payment is due, the final payment will be larger than the others. State law will provide the definition, but typically a balloon payment is a final payment that is at least twice the amount of any other payment. The loan will be considered a partially amortized loan because some of the principal has been paid, with some still owed at the end of the term.
It is frequently assumed that if payments are made promptly, the lender will extend the balloon payment for another limited term. The lender, however, is not legally obligated to grant this extension and can require payment in full when the note is due.