Chapter 6 Summary:

Mortgage Loan Mechanics and Loan Types

Texas Finance

Over the past few years, alternatives to this standard fixed-rate loan have become increasingly more popular. Having more creative choices available for borrowers allows lenders to make more loans to more buyers and at higher loan amounts.

With a graduated payment mortgage (GPM), the monthly payment for principal and interest gradually increases by a certain percentage each year for a certain number of years and then it levels off for the remaining term of the mortgage. The FHA-245 program is a popular graduated payment mortgage program.

With an adjustable-rate mortgage (ARM), the interest rate is linked to an economic index. The loan starts at one rate of interest, but then it fluctuates up or down over the life of the loan as the index changes. The loan agreement describes how the interest rate will change and when. The interest rate the borrower pays is usually the index rate plus a margin. An adjustment period establishes how often the lender can change the rate – monthly, quarterly or annually. Interest rate caps limit the amount of interest the borrower can be charged. A payment cap limits how much the monthly payment can increase. Sometimes lenders offer conversion options. This would allow the borrower to convert the ARM to a fixed-rate loan at certain times during the life of the loan.

As financial communities try to make funds available to those who need real estate loans, new and different variations of payment plans become available. Here is a recap of some of the most common plans.

The two-step mortgage is an ARM loan program in which the interest rate is adjusted only one time – usually five or seven years after the loan is originated.

A growing equity mortgage (GEM) is a fixed-rate mortgage whose payments increase by a fixed amount over a given schedule for an established period of time, often the entire term of the loan.

With a reverse annuity mortgage, the lender is making payments to the borrower. The RAM allows older owners to receive regular monthly payments from the equity in their paid-off property without having to sell. There are three basic types of reverse mortgage.

 Single-purpose reverse mortgages  Federally-insured reverse mortgages  Proprietary reverse mortgages

A shared appreciation mortgage (SAM) is a mortgage in which the lender agrees to an interest rate lower than the prevailing market rate, in exchange for a share of the appreciated value of the collateral property.

A pledged account mortgage (PAM) is a type of graduated payment mortgage under which the owner/borrower contributes a sum of money into an account that is pledged to the lender.

In a buy-down, the lump sum payment that is made to the lender at usually comes from a builder as an incentive to the buyer or from a family member trying to help out.

A renegotiable rate mortgage (RRM) is another type of variable rate mortgage. This mortgage is amortized over 30 years but must be renewed at three-, four-, or five-year intervals.

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Chapter 6 Summary:

Mortgage Loan Mechanics and Loan Types

Texas Real Estate Finance

With a bi-weekly payment mortgage, the borrower pays half of the monthly mortgage payment every two weeks, rather than the full payment once a month.

The main benefit of a zero percent-down mortgage is that it can enable a person to purchase a home now instead of having to wait to save for a down payment, which could take years.

Lenders can use a note and mortgage, a of trust or a land contract document in creative ways to meet the needs of individual borrowers. Let’s recap some of the different options that exist.

An open-end loan is an expandable loan in which the lender gives the borrower a limit up to which he or she may borrow. Each advance the borrower takes is secured by the same mortgage. This loan is also known as a mortgage or deed of trust for future advances.

A construction loan is a type of open-end mortgage, also known as interim financing. A construction loan finances the cost of labor and materials as they are needed and used throughout a building project. A blanket loan covers more than one parcel of real estate, owned by the same buyer, as collateral for the same mortgage.

A package loan is one that finances the purchase of a home along with the purchase of personal items, such as a washer, a dryer, a refrigerator, an air conditioner, carpeting, draperies and furniture or other appliances.

Since the depreciation on mobile homes in the first few years is pretty steep, many lenders prefer to give mobile home loans with a 15-year term instead of the typical 30-year term.

A purchase money loan is most commonly a technique in which the buyer borrows from the seller in addition to the lender.

A is any mortgage loan that is given to a borrower in exchange for cash.

A bridge loan is a short-term loan that covers the period between the end of one loan and the beginning of another.

A wraparound loan allows a borrower who has an existing loan to get another loan from a second lender without paying off the first loan.

A participation loan involves the lender sharing an interest in the property.

With long in place, lenders are willing to allow tenants to pledge their interests as collateral for improvement loans. This is referred to as a leasehold loan.

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