Pledged-account mortgages (pams), Financial Management

PAMs are so structured that the repayments resemble traditional mortgages from the lenders' point of view and resemble GPMs from the borrowers' point of view. This is achieved as follows:

  • Under PAMs some portion of the down payment as required under a traditional mortgage is deposited in a savings account.

  • The borrower then pays installments which are lower than those under traditional mortgage. These installments are increased at a specified percentage for a definite number of years and thereafter the borrower pays equal installments. Thus, for the borrower the payments resemble a GPM.

  • The lender is, however, paid equated monthly installments by drawing the difference between the installment paid by the borrower and the installment due from the pledged savings account.

The difference between payments under traditional mortgage and under a PAM is explained below with the help of an illustration.

Assume that a loan is borrowed for an amount of $110,000 for 30 years at an interest of 10% per annum. The down payment required is $17,535.

Under a traditional mortgage, the borrower would pay the down payment of $17,535 and make an equated monthly payment of $811.46.

Under a PAM mortgage, the structure would be as follows:

  • The borrower would make a down payment of $10,000 and deposit $7,535 in a pledged savings payment. Let us assume that this deposit earns an interest of 5¼%.

  • The borrower would make graduated payments for 6 years increasing at a rate of 6% every year, and thereafter up to the 30th year the payments would be equated.

  • The lender would receive an equated monthly payment of $877.58 throughout the term of the mortgage.

  • The gap between the amount payable to the lender and payment made by the borrower will be made up through withdrawals from the pledged savings account.

The amount of payment by the borrower and the amount drawn from the savings account for each year are given below:

Table 4

Year(s)

Graduated Monthly Payment made by Borrower ($)

Amount Drawn from Savings Account ($)

Payment made to Lender ($)

1

655.78

221.80

877.58

2

695.12

182.46

877.58

3

736.84

140.74

877.58

4

781.04

96.54

877.58

5

827.90

49.68

877.58

6-30

877.58

-

877.58

PAMs are used by borrowers who have sufficient cash on hand, but face an income or cash flow shortage for the first few years. With the cash on hand the pledged savings is opened, as it subsidizes the monthly payment and lowers the cash outgo.

Posted Date: 9/8/2012 7:39:45 AM | Location : United States







Related Discussions:- Pledged-account mortgages (pams), Assignment Help, Ask Question on Pledged-account mortgages (pams), Get Answer, Expert's Help, Pledged-account mortgages (pams) Discussions

Write discussion on Pledged-account mortgages (pams)
Your posts are moderated
Related Questions
Your task is to prepare a presentation for a group of board members who are considering an investment of $100 million in your company. Your presentation will consist of three disti

Once capital markets are integrated, it is hard for a country to maintain a fixed exchange rate. Explain why this may be so. Answer: one time capital markets are integrated int

Mr. Lam holds title to an asset worth €125.72. In order to raise money for an unrelated purpose, he plans to sell the asset in nine months. But Mr. Lam is concerned about the uncer

1. Suppose a firm's tax rate is 35%. What affect would a $10 million operating expense have on this year's earnings?  What effect would it have on next year's earnings? 2. What

A revenue bond is a special type of municipal bond distinguished by its guarantee of repayment from revenues generated by a specifie

Fund of hedge Funds The universe of Fund of Funds (FoFs), often referred to as Fund of Hedge Funds, continues to grow from Year 2000, both in absolute terms and as a relative c

Analyze a Startup How would you select an organizational form for a business? Think about this question as you read the following scenario. Joe Jones has created a business

The actual risk-free rate is 4%. Inflation is likely to be 3% this year and 4% during the next 2 years. We suppose that the maturity risk premium is zero. What is the yield on 2

CAPITALISATION RATE=0.01 EARNINGS PER SHARE(E)=10 ASSUME RATE OF RETURNS ON INVESTMENTS (R):15

We have seen the valuation of bonds with embedded option using binomial model. This method can be used when cash flows do not depend on how interest rates evolve.