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Unit 7 Real Estate Financing Programs

Terms in this set (68)

Qualifying Rate

Because ARM interest rates fluctuate from time to time, the rate at which to qualify a borrower often creates problems. If the initial loan rate is low but is expected to increase in the near future, the borrower may not be able to make the higher payments. Lenders may require a borrower making less than 20 percent down payment to qualify at the maximum second-year rate. However, all interest rate adjustments on the loan will be made from the initial loan rate.

Index

The index is the starting point to adjust a borrower's applicable interest rate. Lenders must use an index that is readily available to the borrower but beyond the control of the lender. Some indexes are more volatile than others. Those most frequently used are the
• one-year constant-maturity Treasury (CMT) securities,
• Eleventh District Cost of Funds Index (COFI), and
• London Interbank (LIBOR) interest rates.
Margin

Each lender adds a margin percentage rate to the index at every adjustment period to derive the new note rate. Individual lenders set their own margins based on their estimated expenses and profit goals. The margin percentage rate may not change throughout the life of the loan. Typical margins range from 2 to 3 percent.

Interest Rate Caps

Most variable rate loans include an annual cap applied to the adjusted interest rate. This cap limits interest rate increases or decreases over a stated period of time and varies from lender to lender and ranges from one to two percentage points per year. Most lenders also include a life-of-the-loan interest cap ranging up to 6 percent. This combination of caps should provide the borrower protection against debilitating payment increases.
In communities across America, borrowers have lost their homes because of the actions of predatory lenders, appraisers, mortgage brokers, and home improvement contractors. Other predatory lending practices include:
• lending on properties for more than they are worth using inflated appraisals;
• encouraging borrowers to lie about their income, expenses, or cash available for down payment;
• knowingly lending more money than a borrower can afford to repay;
• charging high interest rates to borrowers based on their race or national origin;
• charging fees for unnecessary or nonexistent products and services;
• pressuring borrowers to accept higher-risk balloon or interest-only loans, or loans with steep prepayment penalties or possible negative amortization;
• stripping homeowners' equity from their homes by convincing them to refinance again and again when there is no benefit to the borrower;
• using high-pressure sales tactics to sell home improvements and single-premium mortgage insurance; and
• steering the borrower into a subprime mortgage when they could have qualified for a mainstream loan. Fannie Mae has estimated that up to one-half of borrowers with subprime mortgages could have qualified for loans with better terms.

Two types of loans that are not necessarily predatory but could be if the borrower does not understand the implications of the loan are the following:
• Balloon loan requiring full payment at the end of the initial term;
• Interest-only loan with balance of principal plus interest due at end of term.