Ch. 10: Mortgage Market

1
Ch. 10 Mortgage Market

• Fixed-Rate Mortgage
• PV 100,000
• FV 0
• I 7/12
• N 360
• PMT 665.30
• Monthly Payment contains interest principal

2
Amortization Schedule

• Beg. Bal. Pmt Interest
  Principal End Bal.
• 1 100,000.00 665.30 583.33
  81.97 99,918.03
• 2 99,918.03 665.30 582.86
  82.45 99,835.58
• 3 99,835.58 665.30 582.37
  82.93 99,752.66
• 12 99,071.58 665.30 577.92
  87.38 98,984.20
• 60 94,247.11 665.30 549.77
  115.53 94,131.58

3
Monthly Principal Interest
4
Outstanding Balance
5

• Total Interest Paid
• 30 vs. 15 year loans
• Paying a Mortgage off early. What is saved?
• Points and Rates
• 1 point 1 of loan.
• Effect of points on effective rate.

6
Sample of Mortgage Rates, Mar. 2001

• Interest
• Rate Points
• 7.13 0.375
• 6.88 1.375
• 6.63 2.500

7
Effect of Paying Points

• Suppose 6.63 2.5 points
• Loan Amt 100,000
• Pmt 640.64
• What is the effective rate?
• PV 100,000 2.5 97,500
• PMT 640.64
• FV 0, N 360, I .5731 12 6.88

8
Suppose Loan is Paid off in 3 years?

• What is the effective rate?
• PV 100,000 2.5 97,500
• PMT 640.64
• FV 96,499.99
• N 36
• I .6316 12 7.58

9
Adjustable Rate Mortgage (ARM)

• Interest rate changes
• Related to an index spread
• Frequency of adjustment
• Rate caps
• Payment caps
• Negative Amortization

10
ARM Amortization Schedule

• Rate Beg. Bal. Pmt. Interest
  Principal End Bal.
• 1 7 100,000.00 665.30 583.33 81.97
  99,918.03
• 12 7 99,071.58 665.30 577.92 87.38
  98,984.19
• 13 8 98,984.19 732.43 659.89 72.54
  98,911.65

11

• Other Kinds of Mortgages
• Graduated Payment Mortgage (GPM)
• Adjustable-Rate, Graduated Payment
• Growing Equity Mortgage (GEM)
• Reverse Annuity Mortgage (RAM)
• Shared Appreciation Mortgage (SAM)
• Balloon Payment
• Interest Only Mortgage
• Second Mortgage

12
Mortgage Insurance

• FHA insurance payment
• VA no insurance payment
• Conventional insurance payment
• United Guaranty
• Escrow of Taxes Insurance

13
Secondary Mortgage Market

• Mortgage Market Intermediation
• Government Sponsored Agencies
• FNMC Fannie Mae
• GNMC - Ginnie Mae (part of HUD)
• FHLMC Freddie Mac
• Investment Bankers

14
Secondary Market Securities

• Mortgage-Backed Bonds
• Pass-Through Securities
• Collateralized Mortgage Obligation (CMO)
• Real Estate Mortgage Investment Conduit (REMIC)

15
Homework

• Page 324 Problems 1 3