FIN 101 Lecture 15: Mortgage- Shop Around For Interest Rates

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periwinklemammoth360

16 Aug 2020

School

Ball State University

Department

Finance

Course

FIN 101

Professor

Olga S Mc Atee

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Document Summary

Two of the biggest factors that affect your mortgage payment: Ge the lowest interest rate possible without paying points or more fees. It doesn"t matter which bank you choose to use or lender you get your mortgage from. Your mortgage will most likely be sold to one or more lenders during the time of your loan lifetime. It doesn"t mean anything to you except you"ll be writing the check to another person. Who can look at multiple lenders from different states and find the one with the lowest rates and best terms. One thing to remember: mortgage brokers earn their feed by bringing people who borrow to those who lend. They also use this to build their reputation and business by bringing those who borrow to good deals and good interest rates. Do your research and go to a couple of local banks in your area. Bank loan officers are limited to giving rates offered by their specific bank.

Related Questions

Alan recently joined Friendly Investment and Financing Options(FIFO) as a loan officer. FIFO is a national company thatspecializes in mortgage lending. One of Alanâs responsibilities isto increase the amount of mortgages FIFO initiates. In a meeting hehad with the CEO yesterday, Alan was told about a new mortgage thatFIFO intends to market. The new mortgage is called an optionadjustable rate mortgage, or an option ARM for short, and its mostattractive feature is that homeowners can choose to make relativelylow monthly payments at the beginning of the mortgage period.However, the payments increase significantly later in the life ofthe mortgage. In fact, depending on the amount the borrower choosesto pay early (hence, the term âoptionâ), the amounts that must bepaid later could be substantialâas much as four to five times theinitial payments. In many cases, when a homeowner chooses to paythe minimum amount or an amount that he or she can afford, themortgage turns âupside down,â which means that the amount due onthe mortgage grows to an amount that is greater than the value ofthe house. The primary benefit of option ARMs to borrowers is thatsuch loans allow those who cannot afford the monthly paymentsassociated with conventional mortgages the opportunity to purchasehouses. A borrower with income that is lower than is needed toqualify for a conventional mortgage can borrow using option ARMs,choose an affordable (lower than conventional) payment in the earlyyears of the mrotgage, and then make the higher payments in lateryears, when their incomes presumably will be higher. Thus, optionARMs permit those who canât afford conventional mortgages to buyhouses today that they otherwise couldnât afford until years intothe future. Lenders such as FIFO like selling option ARMs becausethey can recognize as current revenues the monthly payments thatwould be required if the loans were conventional mortgages,regardless of the amounts that the borrowers opt to pay. In otherwords, companies can âbookâ revenues that will not be collected fora few years. Unlike most people, including many professionals, Alanunderstands the complexities of option ARMs. He knows that manyborrowers who choose such mortgages will lose their houses three tofive years after buying them because the payments increase sosignificantly after the low-payment option period expires thatthese borrowers cannot afford the new monthly payments. And,although they would like to refinance with conventional mortgages,often these homeowners do not have good enough credit. Thisscenario is quite disturbing to Alan. He would like to explain tohis customers in clear terms the possible pitfalls of option ARMs,but the CEO of FIFO has instructed Alan that he should provide onlythe information that is required by law and to follow companypolicy, which states that lending officers should provide basicprinted material, give simple advice, and answer questions thatmight provide negative information only when asked. Alan has a badfeeling about option ARMs. He knows that they are greatlending/borrowing tools when used as intended. He is afraid,however, that FIFO is more concerned about booking revenues thanabout the financial wellbeing of its customers (borrowers). Whatshould Alan do? How would you handle this situation if you wereAlan?

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It's due tommorow and need help with these following problems.

Please solve the following problems. Show all relevant time lines and calculations and make sure to highlight the final answer to the question. Where MS Excel is required, please either cut and paste the spreadsheet where it belongs or staple the printout directly from MS Excel. For spreadsheets that are too long to print, just include a sample printout of the first and last pages. Note that some questions require a written answer, not just a number.

Vanilla Ice Co. bonds pay an annual coupon rate of 10% and have 5 years to maturity. If investors' required rate of return is now 8% on these bondsâ¦

Will the bonds be selling at a premium or a discount with respect to their $1000 face value? Why?

b. What is the price of the bonds?

Austin Power Co. bonds have a 14% annual coupon rate. Interest is paid semi-annually. The bonds have a par value of $1,000 and will mature 10 years from now. If the (annual) required rate of return is 12%, what is the price of the Austin Power bonds? [Hint: you need to convert your coupon rate, your number of periods, n, and your req. rate of ret. to a semi-annual basis.]

Consider a $1,000 par value bond with a 9 percent annual coupon that is currently selling for $943. The bond pays interest annually. There are 15 years remaining until maturity.

What is the size of the annual coupon payments?

What is the current yield on the bond?

A preferred share of Phillips, Co. is currently selling for $65.00 on the New York Stock Exchange. If this instrument pays a dividend of $5 a year, what is its yield?

Assume that you plan to buy a share of IBM stock today and to hold it for 2 years. Your expectations are that youâll receive a dividend of 19.00 at the end of Year 1 and a dividend of $19.25 at the end of Year 2. In addition, you expect to sell the stock for $150 at the end of Year 2. If your expected rate of return is 11 percent, how much should you be willing to pay for this stock today?

A share of common stock has just paid a dividend of $2.00. If the expected long-run growth rate for this stock is 15 percent, and if investors require a 19 percent rate of return, what is the price of the stock?

What would be the interest earned on a $6,000 deposit during the second year of its life if no money is withdrawn from the bank during that time, and the deposit pays an annual interest rate of 2.5 percent, with annual compounding?

Using excel, build a monthly amortization table for a 30-year mortgage on a $350,000 home, no money down. Use 7% as the yearly interest on the loan.

Using the amortization table you built for Question 8, answer the following questions.

How much money will you still owe on the loan after making one full year of payments?

How much money will you still owe on the loan after making 10 full years of payments?

If you want to refinance after 15 years of making payments, how much financing would you need to secure from your bank to do so?

How much money can you expect to pay in interests alone during the 30 year life of the mortgage?

You plan to purchase a $100,000 house using a 30-year mortgage obtained from local credit union. The mortgage rate offered to you is 8.25%. You will make a down payment of 20% of the purchase price.

Calculate your monthly payments on this mortgage.

Calculate the amount of interest and, separately, principal paid in the 25^th payment.

Calculate the amount of interest and, separately, principal paid in the 225^th payment.

Calculate the amount of interest paid over the life of this mortgage.

You plan to purchase a house for $115,000 using a 30-year mortgage from your local bank. You will make a down payment of 20% of the purchase price.

Your bank offers you the following two options for payment:

Option 1: Mortgage rate of 9% and zero discount points.

Option 2: Mortgage rate of 8.85% and two discount points.

Which option would you choose?

Your bank offers you the following two options for payment:

Option 1: Mortgage rate of 10.25% and 1 discount point.

Option 2: Mortgage rate of 10% and 2.5 discount points.

Which option would you choose? [Hint: consider only the incremental costs and benefits of Option 2 with respect to Option 1]

You just got a promotion and you are now taking home $75,000 a year before taxes. You are thinking about upgrading your home and moving to a nicer neighborhood. Youâve been living for the past six years in a 1,300 square foot, 3 bed/2 bath home, currently valued at $137,000. Thanks to the strong capital appreciation of the past few years, you estimate that after liquidating the mortgage and covering realtor fees, youâll be able to walk away with $40,000, which you intend to use as down payment on your new home. Your debt payments ratio is only 7% and your credit rating is 700, so qualifying for a loan wonât be a problem. The best bank rate youâve found is 5.9% fixed for a 30 year mortgage.

Ignoring mortgage insurance premiums, homeownerâs insurance premiums, and property tax obligations, how much of a home could you afford?

Would your mortgage be considered conforming or non-conforming?

Do you think youâll be required to obtain private mortgage insurance? Why?

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Discussion Scenario: Connecticut Abusive Home Loan Lending Practices Act

Ian and Rebecca Davidson were struggling financially and were growing more and more concerned about their ability to make their monthly mortgage payments. Ever since Rebecca lost her job at the car dealership, the Davidsons were spending more each month than they were taking in. One option, they both agreed, was to refinance their mortgage before they ended up in foreclosure.

And then one day a near miracle occurred â they saw a television advertisement for Nasturtium Capital that offered refinancings for people just like them at rates far below the one they paid on their current mortgage. They jotted down the number, called the next morning, and set up a meeting for the following Saturday.

They met that day with Sean Caulfield, a mortgage loan originator, who explained to them the various loan options that Nasturtium offered. When the Davidsons expressed a particular interest in the loan they saw advertised, Caulfield told them that it was a 15-year variable-rate mortgage with a low introductory rate. He also disclosed that the APR for the loan was 10.25%, only 6.75 percentage points above the APOR, which was âbasically a steal!â according to Caulfield.

In addition, Caulfield gave them:

The amount of the regular monthly payment

A statement that the interest rate and monthly payments could increase and the maximum monthly payment, and

A statement that they were not required to complete the agreement, which met Connecticutâs disclosure requirement

They then discussed loan term specifics. Among the terms were the following:

A provision requiring a prepayment penalty of 3% if the loan was repaid in the first year, a penalty of 2% if the loan was repaid in the second year, and a penalty of 1% if the loan was repaid in the third year.

A provision that would allow the Davidsons to convert their payment schedule to one that permitted lower payments in the event of a financial emergency. The Davidsons particularly liked this provision because of the flexibility it gave them, but asked Caulfield how this type of arrangement would be possible. Caulfield shrugged, explaining that the payments would just leave out a portion of the interest due, and the Davidsons could âcatch upâ with the payments when they were able.

A provision allowing Nasturtium to call the loan due in the event of a collapse in real estate prices similar to the one that occurred in 2008. The calculation was complicated, but essentially it gave Nasturtium the right to call the loan due if the value of the property fell below 85% of the outstanding loan balance.

The Davidsons decided to fill out a loan application. In listing their income, they used the amount of income they had before Rebecca lost her job. They did so because Rebecca had received a call on Friday from her former employer telling her that business had picked back up and that they hoped to be able to rehire her. Using the income provided in the application, Caulfield did a back-of-the-envelope calculation and determined that the Davidsonâs monthly mortgage payment was only about 35% of their combined gross monthly income.

1. If Nasturtium advertises that refinancing an existing debt with a high-cost loan will reduce the borrowerâs total monthly debt, what else must the company disclose?

2. List two disclosure obligations that Sean Caulfield has under the Connecticut Abusive Home Loan Lending Practices Act.

3. List two terms in Ian and Rebeccaâs loan that violate the Connecticut Abusive Home Loan Lending Practices Act.

4. Did Sean Caulfield properly calculate and verify the Davidsonsâ monthly gross income? Explain why or why not.

FIN 101 Lecture 15: Mortgage- Shop Around For Interest Rates

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