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Ch. 10: Mortgage Market

Ch. 10: Mortgage Market. Fixed-Rate Mortgage PV = 100,000 FV = 0 I = 7%/12 N = 360 PMT = $665.30 Monthly Payment contains interest & principal . Amortization Schedule. # Beg. Bal. Pmt Interest Principal End Bal.

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Ch. 10: Mortgage Market

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  1. Ch. 10: Mortgage Market Fixed-Rate Mortgage PV = 100,000 FV = 0 I = 7%/12 N = 360 PMT = $665.30 Monthly Payment contains interest & principal

  2. Amortization Schedule # Beg. Bal. Pmt Interest Principal End Bal. 1 $ 100,000.00 $ 665.30 $ 583.33 $ 81.97 99,918.03 2 $ 99,918.03 $ 665.30 $ 582.86 $ 82.45 99,835.58 3 $ 99,835.58 $ 665.30 $ 582.37 $ 82.93 99,752.66 12 $ 99,071.58 $ 665.30 $ 577.92 $ 87.38 98,984.20 60 $ 94,247.11 $ 665.30 $ 549.77 $ 115.53 94,131.58

  3. Monthly Principal & Interest

  4. Outstanding Balance

  5. Total Interest Paid • 30 vs. 15 year loans • Paying a Mortgage off early. What is saved? • Points and Rates: • 1 point = 1% of loan. • Effect of “points” on effective rate.

  6. Sample of Mortgage Rates, Mar. 2001 Interest RatePoints 7.13% 0.375 6.88% 1.375 6.63% 2.500

  7. Effect of Paying Points Suppose: 6.63% + 2.5 points Loan Amt = $100,000 Pmt = 640.64 What is the effective rate? PV = 100,000 – 2.5% = 97,500 PMT = 640.64 FV = 0, N = 360, I = .5731 * 12 = 6.88%

  8. Suppose Loan is Paid off in 3 years? What is the effective rate? PV = 100,000 – 2.5% = 97,500 PMT = 640.64 FV = 96,499.99 N = 36 I = .6316 * 12 = 7.58%

  9. Adjustable Rate Mortgage (ARM) • Interest rate changes • Related to an index + spread • Frequency of adjustment • Rate caps • Payment caps • Negative Amortization

  10. ARM Amortization Schedule # Rate Beg. Bal. Pmt. Interest Principal End Bal. 1 7% 100,000.00 665.30 583.33 81.97 99,918.03 12 7% 99,071.58 665.30 577.92 87.38 98,984.19 13 8% 98,984.19 732.43 659.89 72.54 98,911.65

  11. Other Kinds of Mortgages • Graduated Payment Mortgage (GPM) • Adjustable-Rate, Graduated Payment • Growing Equity Mortgage (GEM) • Reverse Annuity Mortgage (RAM) • Shared Appreciation Mortgage (SAM) • Balloon Payment • Interest Only Mortgage • Second Mortgage

  12. Mortgage Insurance • FHA – insurance payment • VA – no insurance payment • Conventional – insurance payment • United Guaranty • Escrow of Taxes & Insurance

  13. Secondary Mortgage Market • Mortgage Market Intermediation • Government Sponsored Agencies • FNMC – Fannie Mae • GNMC - Ginnie Mae (part of HUD) • FHLMC – Freddie Mac • Investment Bankers

  14. Secondary Market Securities • Mortgage-Backed Bonds • Pass-Through Securities • Collateralized Mortgage Obligation (CMO) • Real Estate Mortgage Investment Conduit (REMIC)

  15. Homework • Page 324: Problems 1 & 3

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