Log in
HomeClass Notes1,200,000US530,000

FI 413 Lecture Notes - Lecture 42: Balloon Payment Mortgage, Title Insurance, Origination Fee

14 views3 pages
School
MSU
Department
Finance
Course
FI 413
Professor
Johner

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

Propriety loans: private loans, more expensive, but often allow homeowners to borrow more than they can with a. Hecm: limit is ,500 unless the home is located in a high-cost area where higher loan limits apply. When there is strong evidence for increased future income: borrower wants a quick capital gain. To purchase more house on less income when a geographic area is undergoing rapid value gains: for borrowers who intend to sell the property quickly, borrower wants to invest their cash flow. People who can guarantee their funds are better invested than placed into home equity. Lender agrees to a reduced payoff on a loan when the subject property is sold. Forbearance: lender agrees to a reduction or suspension of loan payments for an agreed upon period of time, at the end of the period, the borrower is responsible for resuming payments and making up past due amounts.

Get access

Grade+
$40 USD/m
Billed monthly
Grade+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
10 Verified Answers
Class+
$30 USD/m
Billed monthly
Class+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
7 Verified Answers

Related Documents

FI 413 Lecture Notes - Lecture 40: Interest Rate, Libor, Negative Amortization
harlequinsalmon729
FI 413 Lecture 19: FI 413
harlequinsalmon729
FI 413 Lecture Notes - Lecture 21: Federal Housing Administration, Fha Insured Loan, Adjustable-Rate Mortgage
harlequinsalmon729

Related Questions

Alan recently joined Friendly Investment and Financing Options(FIFO) as a loan officer. FIFO is a national company thatspecializes in mortgage lending. One of Alan’s responsibilities isto increase the amount of mortgages FIFO initiates. In a meeting hehad with the CEO yesterday, Alan was told about a new mortgage thatFIFO intends to market. The new mortgage is called an optionadjustable rate mortgage, or an option ARM for short, and its mostattractive feature is that homeowners can choose to make relativelylow monthly payments at the beginning of the mortgage period.However, the payments increase significantly later in the life ofthe mortgage. In fact, depending on the amount the borrower choosesto pay early (hence, the term “option”), the amounts that must bepaid later could be substantial—as much as four to five times theinitial payments. In many cases, when a homeowner chooses to paythe minimum amount or an amount that he or she can afford, themortgage turns “upside down,” which means that the amount due onthe mortgage grows to an amount that is greater than the value ofthe house. The primary benefit of option ARMs to borrowers is thatsuch loans allow those who cannot afford the monthly paymentsassociated with conventional mortgages the opportunity to purchasehouses. A borrower with income that is lower than is needed toqualify for a conventional mortgage can borrow using option ARMs,choose an affordable (lower than conventional) payment in the earlyyears of the mrotgage, and then make the higher payments in lateryears, when their incomes presumably will be higher. Thus, optionARMs permit those who can’t afford conventional mortgages to buyhouses today that they otherwise couldn’t afford until years intothe future. Lenders such as FIFO like selling option ARMs becausethey can recognize as current revenues the monthly payments thatwould be required if the loans were conventional mortgages,regardless of the amounts that the borrowers opt to pay. In otherwords, companies can “book” revenues that will not be collected fora few years. Unlike most people, including many professionals, Alanunderstands the complexities of option ARMs. He knows that manyborrowers who choose such mortgages will lose their houses three tofive years after buying them because the payments increase sosignificantly after the low-payment option period expires thatthese borrowers cannot afford the new monthly payments. And,although they would like to refinance with conventional mortgages,often these homeowners do not have good enough credit. Thisscenario is quite disturbing to Alan. He would like to explain tohis customers in clear terms the possible pitfalls of option ARMs,but the CEO of FIFO has instructed Alan that he should provide onlythe information that is required by law and to follow companypolicy, which states that lending officers should provide basicprinted material, give simple advice, and answer questions thatmight provide negative information only when asked. Alan has a badfeeling about option ARMs. He knows that they are greatlending/borrowing tools when used as intended. He is afraid,however, that FIFO is more concerned about booking revenues thanabout the financial wellbeing of its customers (borrowers). Whatshould Alan do? How would you handle this situation if you wereAlan?