Mortgage Loan Decision: A Tough Decision

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Mortgage Loan DecisionA Tough Decision

• Long Payout Commitment
• Finance Charges that exceed the actual principal
• Bad Payment Choices can cost literally 10s of
  thousands of dollars

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Definitions

• Finance Charges Cost of interest from taking
  out a loan, where the bank makes a profit
• CD Initials for Certificate of Deposit money
  deposited that will lock in a return from
  interest if kept deposited for a specific amount
  of time.
• Mortgage Loan Money borrowed that will be paid
  off in a specific amount of time in installments
  at specified times, usually charges an interest
  rate on money borrowed.

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Definitions

• Back End of Note Payment made that does not
  roll a due date, the next payment must
• be made at originally scheduled time.
• Home Equity Loan Money that can be borrowed
  against the money that has already been paid into
  an original Mortgage loan for a house. Up to 80
  of the appraised amount of property may be
  borrowed (Wilson).
• Fannie Mae or Freddie Mac Government Agency
  that buys loans from banks and provide better
  interest rates, plus benefit the banks

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Assumptions

• Government Agency bought the loans providing a
  fixed rate and payments on the back-end of the
  note
• They have already purchased some type of term
  insurance
• Three payments are feasible within the budget

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Questions

• How many years can be cut off the note by paying
  one, two, and three payments extra each year?
•  What if the customer does not know if they can
  afford to make extra payments?
•  What are some alternatives and would they be
  beneficial?

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Approximate Figures for Early Payoff
No Extra Payments 1 Extra Payment 2 Extra Payments 3 Extra Payments
Time to Payoff 30 Years 25 Years 21 ½ Years 19 Years
Interest Saved - 11,666.70 23,333.40 35,000.10
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Home Equity Loan Information

• Can be taken up to 80 of appraised value
• Reduces risk of paying extra on home
• Allows a cushion for unexpected situations

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Other alternatives

• Putting money back into a deposit account drawing
  interest BankRate
• Investing into the stock or bond markets - S P
  500
• Shooting your spouse and collecting the insurance

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Decision

• Our advice would be to pay as many payments as
  possible
• Finance Charge Advantage
• Accessible Money through Home Equity
• May be reevaluated for a better deal later