ASSIGNMET # 2

Mortgages

SUBMITTED BY:

Syed Haseeb Usman Gillani

Reg # 1452-409012

E. MBA

SUBMITTED TO:

DATE:

February 9, 2010

SUBJECT:

Financial Institutions
MORTGAGE (Mortgage Loan):

A mortgage loan is a loan secured by real property through the use of a document which
evidences the existence of the loan and the encumbrance of that realty through the granting of
a mortgage which secures the loan. However, the word mortgage alone, in everyday usage, is
most often used to mean mortgage loan.
A home buyer or builder can obtain financing (a loan) either to purchase or secure against the
property from a financial institution, such as a bank, either directly or indirectly through
intermediaries. Features of mortgage loans such as the size of the loan, maturity of the loan,
interest rate, method of paying off the loan, and other characteristics can vary considerably.

Mortgage loan types:

There are many types of mortgages used worldwide, but several factors broadly define the
characteristics of the mortgage. All of these may be subject to local regulation and legal
requirements.

 Interest: interest may be fixed for the life of the loan or variable, and change at certain
pre-defined periods; the interest rate can also, of course, be higher or lower.
 Term: mortgage loans generally have a maximum term, that is, the number of years after
which an amortizing loan will be repaid. Some mortgage loans may have no amortization, or
require full repayment of any remaining balance at a certain date, or even negative
amortization.
 Payment amount and frequency: the amount paid per period and the frequency of
payments; in some cases, the amount paid per period may change or the borrower may have
the option to increase or decrease the amount paid.
 Prepayment: some types of mortgages may limit or restrict prepayment of all or a portion
of the loan, or require payment of a penalty to the lender for prepayment.
1. Fixed rate mortgage:

A fixed rate mortgage (FRM) is a mortgage loan where the interest rate on the note remains the
same through the term of the loan, as opposed to loans where the interest rate may adjust or
"float." Other forms of mortgage loan include interest only mortgage, graduated payment
mortgage, variable rate (including adjustable rate mortgages and tracker mortgages) , negative
amortization mortgage, andballoon payment mortgage. Please note that each of the loan types
above except for a straight adjustable rate mortgage can have a period of the loan for which a
fixed rate may apply. A Balloon Payment mortgage, for example, can have a fixed rate for the
term of the loan followed by the ending balloon payment. Terminology may differ from country
to country: loans for which the rate is fixed for less than the life of the loan may be called hybrid
adjustable rate mortgages (in the United States).
This payment amount is independent of the additional costs on a home sometimes handled
in escrow, such as property taxes and property insurance. Consequently, payments made by the
borrower may change over time with the changing escrow amount, but the payments handling the
principal and interest on the loan will remain the same.
Fixed rate mortgages are characterized by their interest rate (including compounding frequency,
amount of loan, and term of the mortgage). With these three values, the calculation of the
monthly payment can then be done.
2. Adjustable-rate mortgage:

An adjustable rate mortgage (ARM) is a mortgage loan where the interest rate on the note is
periodically adjusted based on a variety of indices.[1] Among the most common indices are the
rates on 1-year constant-maturity Treasury (CMT) securities, the Cost of Funds Index(COFI), and
the London Interbank Offered Rate (LIBOR). A few lenders use their own cost of funds as an
index, rather than using other indices. This is done to ensure a steady margin for the lender,
whose own cost of funding will usually be related to the index. Consequently, payments made by
the borrower may change over time with the changing interest rate (alternatively, the term of the
loan may change). This is not to be confused with the graduated payment mortgage, which offers
changing payment amounts but a fixed interest rate. Other forms of mortgage loan include
the interest only mortgage, the fixed rate mortgage, the negative amortization mortgage, and
the balloon payment mortgage. Adjustable rates transfer part of the interest rate risk from
the lender to the borrower. They can be used where unpredictable interest rates make fixed rate
loans difficult to obtain. The borrower benefits if the interest rate falls and loses out if interest
rates rise.
Adjustable rate mortgages are characterized by their index and limitations on charges (caps). In
many countries, adjustable rate mortgages are the norm, and in such places, may simply be
referred to as mortgages.

3. Balloon payment mortgage:

A balloon payment mortgage is a mortgage which does not fully amortize over the term of
the note, thus leaving a balance due at maturity.[1] The final payment is called a balloon
payment because of its large size. Balloon payment mortgages are more common in
commercial than in residential real estate.[2] A balloon payment mortgage may have a fixed or a
floating interest rate.
An example of a balloon payment mortgage is the 7-year Fannie Mae Balloon, which features
monthly payments based on a 30-year amortization. In the United States, the amount of the
balloon payment must be stated in the contract if Truth-in-Lending provisions apply to the loan.[1]
Because borrowers may not have the resources to make the balloon payment at the end of the
loan term, a "two-step" mortgage plan may be used with balloon payment mortgages.[1] Under the
two-step plan, sometimes referred to as "reset option", the mortgage note "resets" using current
market rates and using a fully-amortizing payment schedule.[4] This option is not necessarily
automatic, and may only be available if the borrower is still the owner/occupant, has no 30-day
late payments in the preceding 12 months, and has no other liens against the property.[1] For
balloon payment mortgages without a reset option or where the reset option is not available, the
expectation is that either the borrower will have sold the property or refinanced the loan by the
end of the loan term. This may mean that there is are financing risk.
Adjustable rate mortgages are sometimes confused with balloon payment mortgages. The
distinction is that a balloon payment may require refinancing or repayment at the end of the
period; some adjustable rate mortgages do not need to be refinanced, and the interest rate is
automatically adjusted at the end of the applicable period. Some countries do not allow balloon
payment mortgages for residential housing: the lender must continue the loan (the reset option is
required). To the borrower, therefore, there is no risk that the lender will refuse to refinance or
continue the loan.

4. Non-conforming mortgage:

A non-conforming mortgage is a term in the United States for a residential mortgage that does
not conform to the loan purchasing guidelines set by the Federal National Mortgage
Association /Federal Home Loan Mortgage Corporation (Fannie Mae and Freddie Mac).
Mortgages which are non-conforming because they have a dollar amount over the purchasing
limit set by FNMA/FHLMC are often called "jumbo" mortgages. Mortgages which are non-
conforming because they do not meet FNMA/FHLMC underwriting guidelines (such as credit
quality or loan-to-value ratio) are often called "sub prime" mortgages. Non-conforming loans
must remain in a lender's portfolio, or be sold to other companies who purchase non-conforming
loans, or be securitized, with the securities being sold to investors seeking non-conforming
mortgage-backed securities. Consequently, a premium is paid by those obtaining non-conforming
mortgages, generally .25% or .5 points more than the same loan would cost if it were conforming.
The loan amount is adjusted every few years depending upon the average sales price of homes in
the U.S.

5. Graduated payment mortgage loan:

A graduated payment mortgage loan, often referred to as GPM, is a mortgage with low initial
monthly payments which gradually increase over a specified time frame. These plans are mostly
geared towards young men and women who cannot afford large payments now, but can
realistically expect to do better financially in the future. For instance a medical student who is just
about to finish medical school might not have the financial capability to pay for a mortgage loan,
but once he graduates, it is more than probable that he will be earning a high income. It is a form
of negative amortization loan.

6. Reverse mortgage:
A reverse mortgage (or lifetime mortgage) is a loan available to seniors, and is used to release
the home equity in the property as one lump sum or multiple payments. The homeowner's
obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves
(e.g., into aged care).
In a conventional mortgage the homeowner makes a monthly amortized payment to the lender;
after each payment the equity increases within his or her property, and typically after the end of
the term (e.g., 30 years) the mortgage has been paid in full and the property is released from the
lender. In a reverse mortgage, the home owner makes no payments and all interest is added to
the lien on the property. If the owner receives monthly payments, or a bulk payment of the
available equity percentage for their age, then the debt on the property increases each month.
If a property has increased in value after a reverse mortgage is taken out, it is possible to acquire
a second (or third) reverse mortgage over the increased equity in the home. But in certain
countries (including the United States), a reverse mortgage must be the only mortgage on the
property