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Financial Calculations used in Mortgage Lending
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Key Concepts:
Terms in this set (35)
Periodic Interest Rate
AKA Nominal Rate is the amount of interest calculated each payment when the payment periods occur more frequently than the quoted rate.
Periodic Rate Formula
(Annual Rate)÷(# Payments in a year)
Periodic Interest
(Periodic Rate) x (Loan Balance)
Per diem
Daily interest that is calculated by dividing the annual interest rate by # of days in a year. Many lenders use 360 days but some require 365/66.
Formula for Per Diem
1. (Interest Rate) x (Loan Balance) = Annual Interest
2. (Annual Interest) ÷ 365 = Daily Interest Amount
How are loans typically amortized?
Using a 30 day month or 360 day year, and interest is collected in arrears
Calculating Taxes
(Annual Property Taxes)/12=(Monthly Property Taxes)
Calculating Mortgage Insurance
1. (Loan Amount) x (Mortgage Insurance Rate) = Annual PMI
2. (Annual PMI)/12 = (Monthly PMI)
PITI Calculation
(Monthly P&I) + (Monthly Taxes) + (Monthly HO insurance) + (Monthly PMI)
Minimum Down Payment for FHA
Required to have 3.5%
Minimum Conventional Down Payment without PMI
20%
LTV Calculation
(Loan Amount)/(Lesser of Property Value or Purchase Price)
CLTV Calculation
1. (1st Loan Balance) + (2nd Loan Balance) + (All Other Loan Balances) = Total encumbrance
2. (Total Encumbrance)/(lesser of Property Value or Purchased Price)
Front End Ration (Debt-to-Income Ratio)
(Housing Expense)/Income
Housing Expense = PITI
Back End Ratio
(Total Monthly Debts)/Income
Considered far more predictive of future default
Long-Term Deb
Defined as those that will take more than 10 months to repay using the standard or minimum repayment
Appendix Q Regulation Z
The appendix that provides guidelines that creditors must follow when computing DTI ratios in transactions for QM
Discount Points Calculation
(Loan Amount) x 0.01
Temporary Buy-down
Created whe funds are placed in escrow to offset the monthly payments required by the terms of the loan. Escrow funds reduce the payment rate for the period but not the note rate
Cost of Discount
(Loan Amount) x (Points)
Closing Cost of buyer calculation
(Loan Amount) - Payoff - Financing Costs - Government Charges - Prepaid Costs
Adjustable Rate Mortgage
Not available until the 1980s, and popular because they have a low introductory rate, but have periodic interest rate resets.
Fully Indexed Rate
Interest rate that will apply when the introductory rate expires and the rate resets. Required by lenders to calculate periodic payments so that borrowers can determin whether they can make the payments when fully indexed
Hybrid Arms
Initial period during which the itnerest rate is fixed and not subject to adjustment. Once the intro period is over, the loant rate and payment adjust annually. Such as 3/1, 5/1, 7/1.
What does the 1st number in a hybrid arm indicate
And the 2nd
Period of time during which the rate is not subject to adjustment
Time period after expiration of the intro rate,where the rate is permitted to adjust
Adjustment Period
The period between one rate change and the next. Range from 6 months to 5 years
Index
Interest rate determined by the market
Margin
Set number of percentage points that the lender selects to cover the cost of its services and to compensate it for the risk associated with the loan
Types of Indices
LIBOR
COFI
COSI
CMT
Rate Adjustment Caps
Help lenders sell ARMS because they can assure borrowers that there is a limit to how much their interest rates can increase
Periodic Rate Adjustment Cap
Focuses on the amount that the interest rate is allowed to change from one adjustment period to the next. So no matter what the Index rate is, their interest rate will only increased at the capped amount.
Lifetime cap
Establishes a max amount that the interest may increase over the life of a loan
Payment Cap
Used during lending boom, however there is more risk to the borrower, because payments can cap but the interest will rise, therefore monthly payments might not be sufficient to cover the interest due resulting in a negative amortization
Maximum Rate
Start Rate + Lifetime Cap Rate
What is the greatest difference between rules for payment calculations for QM and non-QM
QM rule allows for lenders to limit repayment analysis to the frist 5 years of a loan term
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