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This 1 page Class Notes was uploaded by Frankie O'Conner on Wednesday October 28, 2015. The Class Notes belongs to VSB1002 at Villanova University taught by JamesBorden in Fall. Since its upload, it has received 24 views. For similar materials see /class/230559/vsb1002-villanova-university in Business at Villanova University.
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Date Created: 10/28/15
Mortgages A mortgage is a loan used to purchase a house A fixedrate mortgage is a loan that charges a set rate of interest that does not change over the life of the loan A variablerate mortgage also referred to as an adjustablerate mortgage or ARM is a loan where the rate of interest can change over time The monthly payment on the loan is adjusted when the interest rate changes The length term of a mortgage varies typically ranging from 10 30 years The longer the term the lower the monthly payment will tend to be Thus many borrowers opt for 30 year mortgages even when they have no intention of staying in their houses for that length of time The monthly payment on a mortgage includes repayment of the principal amount borrowed and interest charges Lenders may also collect extra funds to pay the borrower s property taxes and homeowner s insurance If the borrower puts less than 20 cash down on the property the lender may also require the borrower to pay for PMI private mortgage insurance Traditionally lenders required borrowers to pay part of the purchase price of a house in cash nown as a cash down payment The traditional down payment required to avoid paying PMI was 20 However in the past 5 6 six years loans were often made for up to 100 of the purchase price of a house in fact sometimes even greater than that Thus many people were able to purchase homes without having to come up with a substantial cash down payment People who in the past would have been forced to remain renters because of the lack of sufficient cash for a down payment were able to obtain mortgages and buy houses Subprime loans refer to loans made to borrowers with less than prime credentials They may have a poor or no credit history unsteady or unverifiable employment and income or excessive debt Some of these loans were referred to as no doc loans or liar s loans where the borrowers had to show minimal proof of the statements made on their mortgage applications Ninja loans refer to loans where the applicants had no income no jobs and no assets To qualify for a mortgage the conventional rule of thumb in lending used to be that your total debts should not exceed approximately 13 of your gross monthly income However this rule was routinely ignored during the lending mania that occurred in the past 5 6 years Subprime borrowers were offered ARMs with artificially low initial interest rates teaser rates When these rates reset at higher levels many borrowers found themselves unable to afford the higher monthly payments Also many borrowers now find themselves upside down or under water on their mortgages because they owe more on the mortgage than the house is currently worth because of falling housing prices An Alt A mortgage falls somewhere between a prime and a subprime mortgage The term is short for Alternative A paper with A paper signifying a prime mortgage Option ARMs often called pick a payment mortgages let borrowers choose the amount they wanted to pay each month In some cases borrowers are paying less than the accruing interest on the loan When this happens negative amortization occurs where the unpaid portion of the accruing interest gets added to the outstanding loan balance
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