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Mortgage Designs

Mortgage Designs. Fixed, Adjustable, Balloon, and Others. Andrew Grill May 11 th , 2011. What we’re covering. Components A brief history of mortgages in the US Types of Mortgages Price Comparison of types What would you do?. Mortgage Design Components. Principal Amount Interests

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Mortgage Designs

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  1. Mortgage Designs Fixed, Adjustable, Balloon, and Others Andrew Grill May 11th, 2011

  2. What we’re covering • Components • A brief history of mortgages in the US • Types of Mortgages • Price Comparison of types • What would you do?

  3. Mortgage Design Components • Principal Amount • Interests • Types and Rates • Term or Length of loan

  4. Brief History

  5. Today - Loan Types • Fixed Rate Mortgage • Adjustable Rate Mortgage • Balloon • Others

  6. Fixed Rate Mortgage • Fixed monthly payment for term • 10, 15, 20, 30 year terms • 30 year term most common today • Who invests? Non-investors with stable lifestyle, not looking to move in near term

  7. Adjusted Rate Mortgage (ARMs) • ~1% better rate than 30 year fixed • 3, 5, 7, 10 year terms • Example “5/2/2” Cap • “Sophisticated” Investors • Plenty of money in bank

  8. Balloons • Remaining money is due at end of term • 5, 7 most common terms • Investors adverse to risk • Plan on paying or refinancing before balloon payment is due “reset option” (using current market rates) • More common in commercial • Floating or Fixed interest rate • May use monthly payments similar to 30 year

  9. Others • Jumbo Loan - Above conforming limits (~$730k) • Interest Only Loan- 5 or 10 year interest period, remaining 20 years for principal

  10. Others • Negative ARM, Graduated Payment, deferred interest- Unpaid accrued interest is capitalized into principal • Reverse Mortgage- 62 years and older

  11. Price Comparison • Amortization Schedule Comparison • 30 year fixed • 15 year fixed • ARM • Balloon

  12. Price Comparison - Assumptions • $200,000 loan • 15 year interest rate = 4.125% • 30 year interest rate = 4.750% • 5/1 ARM 3.25% - .25%+, 9.50% ceiling (12% possible) • 7/1 Balloon 5.00% Final payment 83rd payment

  13. Annual Price Comparison – years 1-5

  14. Annual Price Comparison – years 5-10

  15. Annual Price Comparison – years 5-10

  16. Price Comparison – Totals

  17. What would you do?

  18. Questions

  19. References • "Balloon/Reset Mortgages." Freddie Mac. N.p., n.d. Web. 4 May 2011. <http://www.freddiemac.com/corporate/buyown/english/mortgages/what_is/balloon_reset.html>. • J., Frank, Franco Modigliani, and Frank Joseph.Foundations of financial markets and institutions. Pearson College Div, 2009. Print. • Maples, Gareth. "The History of Home Mortgages."The History Of. N.p., 9/11/2008. Web. 8 May 2011. <http://www.thehistoryof.net/history-of-home-mortgages.html>. • Norlander, Brent. Personal Interview by Andrew Grill. 27 April 2011 • Office Hours with Professor Brooks

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