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Nontraditional Mortgage Products review

Terms in this set (49)

What are two Government-Sponsored Enterprises
Freddie Mac and Fannie Mae

part of the secondary market
What is a conventional Loan
Fully amortizing
Fixed rate
what kind of loan meets fannie/freddie guidelines
conforming loans
what kind of loan does not meet fannie/freddie guidelines
non conforming loans
Why would a loan be classified as nonconforming?
Size of loan (jumbo loan)

credit quality of the buyer (B or C buyer)
subprime loans
also known as B-C loans

more risks than allowed on conforming market
COMBINED LOAN TO VALUE RATIO (CLTV)
percentage of the property value borrowed through a combination of more than one loan
secondary financing requirements
3% downpayment

no prepayment penalty

no negative amortization

regularly scheduled payments
types of mortgages
fixed rate mortgage

Adjustable Rate Mortgage (ARMs)

Hybrid Mortgage/Interest only

graduated payment mortgage (GPM)

growth equity mortgage (GEM)
Fixed Rate Mortgage
A mortgage in which the interest rate does not change during the entire term of the loan.
Growth Equity Mortgage (GEM)
Fixed rate mortgage set up like a 30 year conventional loan, but payments increase regularly, like an ARM.
Helps payoff the loan sooner.
Adjustable Rate Mortgage (ARM)
a mortgage with an interest rate that increases or decreases during the life of the loan
Components of an ARM
index
margin
rate adjustment period
interest rate cap/floor
conversion option
index (cost of money)
interest rate that fluctuates with the market.
Equity
difference between the value of the property and the oustanding indebtedness secured by the property
margin (spread)
fixed interest rate that
fully indexed rate
current index value + margin
Rate Adjustment Period
The length of time between interest rate changes with an ARM
interest rate cap
A limit of the number of percentage points that an interest rate can be increased during the term of a loan used with an ARM
Rate cap example

2/6
First number is the amount an interest rate can increase/decrease from one period to the next

second number indicates the max interest rate can increase during the entire loan life
rate cap example

5/2/6
first number means that is the largest increase at the first adjustment

second number is the largest increase for subsequent adjustments

third number is the larger rate over the life of the loan
Hybrid ARM
ARM with an initial fixed rate period greater than one year.

ex: 3/1 , 5/1, 7/1, 10/1

borrower gets a teaser rate for fixed amount of time, then followed by an ARM such as a 5/2/6
Conversion option (convertible ARM)
gives the borrower the right to convert from an ARM to a fixed rate loan

NOTE of other factors:
interest rate (higher initial and converted rate)

limited time to convert (between 1st and 5th year)

conversion fee (1%)
Annual Percentage Rate (APR)
Relationship between the cost of borrowing and the total amount financed, represented as a percentage.
Discount Points (buydown)
funds paid to a lender at the beginning of a loan to lower the interest rate of monthly payments
Permanent Buydown
When points are paid to a lender to reduce the interest rate and loan payments for the entire life of the loan
Temporary Buydown
A mortgage loan option through which a home buyer gets his or her interest payments temporarily reduced for the first few years of the loan
level payment buydown
interest rate reduction remaining constant throughout the buydown period
graduated payment buydown
A temporary buydown plan where payment subsidies in the early years of a loan keep payments low, but payments increase each year until they're sufficient to fully amortize the loan.
2-1 buydown (Graduated payment)
2% below the interest rate for 1st year

1.5% for the second year
3-2-1 buydown (graduated payment)
2.5% below the interest rate for 1st year

2% in second year

1.5% in third year
Reverse Mortgage
An arrangement where the lender agrees to pay money to an elderly homeowner, either regularly or occasionally, and to be repaid from the homeowner's equity when he or she sells the home or obtains other financing.

no income requirement

must be 62 or older
Home Equity Conversion Mortgage (HECM)
A reverse mortgage insured by the FHA

implements maximum disbursement of 60% of the principal limit or the sum of mandatory obligations plus 10%

must do a counseling before application of the loan

money is not taxed generally
balloon payment mortgage
a mortgage where the monthly payments are relatively low, but one large payment is required after a specified period to pay off the mortgage loan
Bi-Weekly Mortgage
A fixed-rate mortgage, similar to a standard mortgage, but with payments made every two weeks instead of every month, thus making an extra payment each year.

helps pay off a mortgage earlier
blanket mortgage
A mortgage which covers more than one piece of real estate. Often used by a developer in the financing of undeveloped lots. Contains a partial release clause
Partial Release Clause
A part of a blanket mortgage, which provides for the release of part of the property (used as security in the loan) upon payment of a certain amount of the mortgage.
bridge mortgage
A mortgage that occurs between the termination of one mortgage and the commencement of another. When the next mortgage is taken out, the bridge is repaid.
Cash-Out Mortgage
Allows borrower to get cash for equity that has built up, such as a home equity loan
Construction Mortgage
temporary loan used to finance the construction of improvements and buildings.
Equity Participation Mortgage
A mortgage that lets the lender share part of the earnings, income, or profits from a real estate project.
Home Equity Line of Credit (HELOC)
A line of credit extended to a homeowner that uses the borrower's home as collateral. Once a maximum loan balance is established, the homeowner may draw on the line of credit at his or her discretion. Interest is charged on a predetermined variable rate, which is usually based on prevailing prime rates.
Interest Only Loan
loan amount never decreases

only pays accrued interest and no principal

has a balloon payment at end of term

very rare today

no amortization
Open-End Mortgage
A loan containing a clause which allows the mortgagor to borrow additional money without rewriting the mortgage.
Package Mortgage
A mortgage that secures personal property in addition to real property
Purchase Money Mortgage
A mortgage given by the seller to the buyer to cover all or part of the sale price. Seller financing.
Refinance Mortgage
mortgage that a borrower gives to a lender so that the borrower can redo or change his/her interest rate, term, or both. This becomes a new first mortgage.
Variable Balance Mortgage (VBM)
A loan with an adjustable interest rate, but with payments that never change, instead, as the rate increases or decreases, the balance due changes
Wraparound Mortgage
A mortgage that encompasses any existing mortgages and is subordinate to them
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