Financial Planning, Housing and Consumer Economics
• A mortgage insurance policy protects your lender in case you default on the payments. As a
borrower, you pay the premiums, and the lender is the beneficiary.
• Principal Drawdown:
o The amount of principal that you have paid down from your mortgage over time.
o The best way of computing this part of the equity puzzle is to subtract your current mortgage amount from
the original mortgage amount.
➢ Mortgage Financing
• Most real estate purchases are financed with a mortgage.
o A mortgage is a:
• Long-term loan on real property, which serves as collateral for the loan.
• Legal document that allows the lender to retain title or place a lien or claim on the title and gives
the lender the right to demand full payment if the borrower fails to make payments.
o Securing a mortgage includes decisions about:
• Down payment amount
• Mortgage type:
▪ Interest rate is set at the start of the mortgage and remains unchanged through
the life of the mortgage
▪ Principal and interest payment remains the same
▪ Length of the loan terms can vary:
✓ 30 years
✓ 15 years
- No surprises. Rate and payment stays - Can be more expensive initially.
the same. - Requires refinancing to take advantage
- Easier to budget. of drop in interest rates.
- Easy to understand.
▪ Initial Interest rate and payment – in effect for a period of time. After this
period, rates and payment change drastically even if interest rates are stable.
▪ Adjustment period – the period between rate changes. A loan with a one-year
adjustment period is called a “1-year ARM”
▪ Index – Interest rate is made up of two parts: index and margin. Index is the
measure of interest rates.
▪ Margin – the extra percentage points added by the lender.
▪ Interest rate caps – Periodic adjustment cap & Lifetime cap
▪ Hybrid Arms – have a fixed rate period and an adjustable rate period.
✓ 3/1 ARM, 5/1 ARM
✓ First number tells you the fixed rate period, the second number is the