Mortgage Types

1. Mortgage Types Ryan Bizon

2. Discussion Points

3. Two Main Categories • Residential Mortgage Classified According To: • Lien Status • Credit Classification • Interest Rate Type • Amortization Type • Credit guarantees • Loan Balances • Prepayments and Prepayment Penalties

4. Two main Categories • Commercial Mortgage (Income Producing) Classified As: • Multifamily Properties • Apartment Buildings • Office Buildings • Industrial Properties • Shopping Centers • Hotels • Health Care Facilities • Others

5. Classification • Lien Status • Indicates the loan’s seniority in the event of the forced liquidation of the property because of default by the obligor. • First Lien – A lender is first in line during liquidation of property • Second or Junior Lien – A lender comes after the first lien status is paid off

6. Classification • Credit Classification • Prime Loan – Borrower has strong employment and credit histories with enough income to make payments • Subprime Loan – Borrower has lower credit quality • Alternative-A Loan (alt-A) – Area between

7. Classification • Interest Rate Type • Fixed-Rate Mortgage • Adjustable-Rate Mortgage (ARM) • Index • Periodic Caps / Life Caps / Floor Caps • Hybrid ARM • Most have a 30 or 15 year maturity

8. Classification • Credit Guarantees • Government Loans • Backed by the federal government • Department of Housing and Urban Development (HUD) • Federal Housing Administration (FHA) • Generally small down payment and low level of income • Veterans Affairs (VA) • For veterans and reservists • Private Mortgage Insurer • Conventional Loans

9. Classification • Amortization - Amount of loan payment that repays the principle borrowed • Fully Amortizing Loans • Fixed Rate • Recasting The Loan • ARM • Interest-Only • Lockout Period – Period of time where only the interest is paid

10. Classification • Prepayment: When all or part of the principal is paid off prior to it’s scheduled maturity • Partial Prepayment or Curtailment • Lowers total interest paid • Pays off loan faster • Call Option • Borrower’s right to prepay a loan in whole or part without penalty • Prepayment Penalty Mortgage • A mortgage design that will penalize a borrower for paying off the loan before maturity

11. Commercial mortgages • Income-Producing Properties • Nonrecourse Loans – If borrower fails to make payments the lender can only look to the income-producing property to make the interest and principal payments. • Value is based on properties’ cash flow capabilities • Performance Indicator • Debt-to-Service Coverage Ratio: ratio of a property’s net operating income divided by the debt

12. Balloon Mortgage • A mortgage that does not fully amortize over the life of the loan • Due to this there is a large lump sum due at maturity of loan • Balloon mortgages are typically used in commercial properties rather than residential • Can have a fixed or adjustable interest rate • Used when increase in income is expected or borrower plans to sell property before balloon • In Default • If a borrower fails to make balloon payment • Lender can extend the loan • Default Interest Rate • Higher interest rate charged once borrower is in default

13. Summary • Two Categories • Residential or Commercial • Most Common • 30 / 15 year fixed • 30 / 15 year ARM • Balloon • Classifications • Lien status • Credit Classification • Interest Rate Type • Amortization Type • Credit Guarantees • Loan Balances • Prepayment and Penalties