Facts about mortgages, Financial Management

  • Lenders in the US insist upon some kind of mortgage insurance. There are broadly two types of mortgage insurance - one is originated by the borrower while the other by the lender. The borrower usually arranges the insurance with a life insurance company and such policy provides for the continuing payment of the mortgage after the death of the insured person. This kind of an insurance is cheaper than ordinary life insurance because the death benefit, which is equal to the outstanding mortgage loan, declines over time. The other type of mortgage insurance is taken out by the lender and the premia are paid by the borrower. This policy usually covers only a percentage of the loan amount and the insurance company undertakes to pay the lender the amount insured or the loan amount in full on default by the borrower. If the insurance company pays the loan amount in full, it has the right to seize the property and sell it and retain the sale proceeds. 

  • Mortgage lenders send payment notices reminding borrowers about overdue payments; they record payments, keep records of mortgage balances, administer escrow accounts for payment of property taxes or insurance, send out tax information at year end and initiate foreclosure proceedings in the event of a default. All these functions the lender performs are collectively known as servicing the loans and the fee they collect to perform the function is known as servicing fee. The mortgage rate usually includes the servicing fee. If a mortgage is sold to someone else, the original lender or the originator may still continue to service the loan. The originator would collect the servicing fee from the second lender whose rate of return on the mortgage would be lowered to the extent of the servicing fees.

  • Lenders usually insist upon a down payment on the loan which may range between 5-25% of the purchase price. The down payment creates a margin of safety for the lender and in case the borrower defaults and the property has to be sold, any shortfall in realization does not adversely affect the lender. The term Loan-to-Value ratio or LTV is used by the lenders to indicate the percentage of down payment required by them. Thus, an LTV of 85% means that the borrower would have to make a down payment of 15% of the value of the property. Over a period of time, as the mortgage balance declines, the LTV declines too. High LTVs are quoted only for newer, readily marketable properties and in times of lower interest rates and easy money conditions.

  • A borrower may sometimes want to make a monthly payment that is higher than the agreed upon monthly payment. The excess so paid is towards repayment of principal and is referred to as a prepayment. When this prepayment is not for the entire amount, then it is known as curtailment. Due to these reasons, mortgages may differ in terms of timing and amount of cash flows.

  • As mortgages are sensitive to interest rates, like bonds, its yields, duration and convexity can be calculated even for a mortgage loan.

Posted Date: 9/8/2012 7:25:37 AM | Location : United States

Related Discussions:- Facts about mortgages, Assignment Help, Ask Question on Facts about mortgages, Get Answer, Expert's Help, Facts about mortgages Discussions

Write discussion on Facts about mortgages
Your posts are moderated
Related Questions
Q. Explain about Pay Back Method? Pay Back Method (PB) :- The payback process is the simplest method. This method computed the number of years required to pay back the original

Cash flows from financing activities: Items included in this heading are: Cash receipts Cash payments Cash  receipts  from  iss

Example: - Two firm U as well as L is identical in every respect except that U is unlevered and L is levered. L has Rs. 20Lakh of 8% debt outstanding. The net operating income of b

Duration is often referred to as the approximate percentage change in the price for a 1% change in rates. Now, we will see some other definitions or interpretatio

Q. Illustrate Compound Value Concept? The Compound Value Concept is used to find out the FV of present money. It is the same as the concept of compound interest, wherein the in

From a practical point of view, the feasibility of the project for Maribyrnong Council can be divided into three elements which are: logistical, operational and legal issues. First

State the term- adequate working capital If a firm doesn't have adequate working capital, that is, it doesn't invest sufficient funds in current assets, it can become illiquid

It is a method of budgeting in which the actions that incur costs in every functional area of a company are recorded and their relationships are defined and evaluated. Activities a

What are the specefic control procedures of benchmarking Specific control procedures must be in place which include: O Organisational structure (clear lines of responsibilit

Assume a firm has the following cash flows for the next five years: $50,000, $100,000, $150,000, $200,000, and $300,000. We start this business with an initial investment of $250,0