FHCE 3300 Midterm: study guide 7

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Financial Planning, Housing and Consumer Economics
FHCE 3300
Kim Skobba

• 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: o Fixed-rate: ▪ 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 Pros Cons - 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. o Adjustable-rate: ▪ 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 adjustment period
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