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Understanding Mortgage Market: Rates, Payments, & Strategies

This text explores fixed-rate mortgages, payment structures, points and rates, ARM mortgages, amortization schedules, and various types of mortgages, including GPM, GEM, and more. It also covers mortgage insurance, the secondary mortgage market, and securities. Homework problems included.

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Understanding Mortgage Market: Rates, Payments, & Strategies

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  1. Ch. 10: Mortgage Market Fixed-Rate Mortgage PV = 100,000 FV = 0 I = 7%/12 N = 360 PMT = $665.30 Monthly Payment contains interest & principal

  2. Amortization Schedule # Beg. Bal. Pmt Interest Principal End Bal. 1 $ 100,000.00 $ 665.30 $ 583.33 $ 81.97 99,918.03 2 $ 99,918.03 $ 665.30 $ 582.86 $ 82.45 99,835.58 3 $ 99,835.58 $ 665.30 $ 582.37 $ 82.93 99,752.66 12 $ 99,071.58 $ 665.30 $ 577.92 $ 87.38 98,984.20 60 $ 94,247.11 $ 665.30 $ 549.77 $ 115.53 94,131.58

  3. Monthly Principal & Interest

  4. Outstanding Balance

  5. Total Interest Paid • 30 vs. 15 year loans • Paying a Mortgage off early. What is saved? • Points and Rates: • 1 point = 1% of loan. • Effect of “points” on effective rate.

  6. Sample of Mortgage Rates, Mar. 2001 Interest RatePoints 7.13% 0.375 6.88% 1.375 6.63% 2.500

  7. Effect of Paying Points Suppose: 6.63% + 2.5 points Loan Amt = $100,000 Pmt = 640.64 What is the effective rate? PV = 100,000 – 2.5% = 97,500 PMT = 640.64 FV = 0, N = 360, I = .5731 * 12 = 6.88%

  8. Suppose Loan is Paid off in 3 years? What is the effective rate? PV = 100,000 – 2.5% = 97,500 PMT = 640.64 FV = 96,499.99 N = 36 I = .6316 * 12 = 7.58%

  9. Adjustable Rate Mortgage (ARM) • Interest rate changes • Related to an index + spread • Frequency of adjustment • Rate caps • Payment caps • Negative Amortization

  10. ARM Amortization Schedule # Rate Beg. Bal. Pmt. Interest Principal End Bal. 1 7% 100,000.00 665.30 583.33 81.97 99,918.03 12 7% 99,071.58 665.30 577.92 87.38 98,984.19 13 8% 98,984.19 732.43 659.89 72.54 98,911.65

  11. Other Kinds of Mortgages • Graduated Payment Mortgage (GPM) • Adjustable-Rate, Graduated Payment • Growing Equity Mortgage (GEM) • Reverse Annuity Mortgage (RAM) • Shared Appreciation Mortgage (SAM) • Balloon Payment • Interest Only Mortgage • Second Mortgage

  12. Mortgage Insurance • FHA – insurance payment • VA – no insurance payment • Conventional – insurance payment • United Guaranty • Escrow of Taxes & Insurance

  13. Secondary Mortgage Market • Mortgage Market Intermediation • Government Sponsored Agencies • FNMC – Fannie Mae • GNMC - Ginnie Mae (part of HUD) • FHLMC – Freddie Mac • Investment Bankers

  14. Secondary Market Securities • Mortgage-Backed Bonds • Pass-Through Securities • Collateralized Mortgage Obligation (CMO) • Real Estate Mortgage Investment Conduit (REMIC)

  15. Homework • Page 324: Problems 1 & 3

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