Traditional mortgages, Financial Management

In US, savings and loan associations constitute the major originating group of the traditional loans. What types of properties can be mortgaged? Virtually all forms of real estate can be mortgaged, though they fall into several categories: Residential and Non-residential, etc. The traditional mortgages exhibit the following features:

  • A fixed rate of interest is charged on the loan for its entire term.

  • Loan is repaid in equated monthly installments consisting of both principal and interest. At first, the mortgage payments are mostly interest payments. As the principal outstanding declines, the interest portion of the monthly payments also declines and the principal portion increases.

Consider a 30-year 10% traditional mortgage for a loan of $100,000. The monthly payment and the break up between principal and interest will be as under:

Table 1: Traditional Mortgage (10% Interest Rate, 30-Year Term)

Month

Mortgage Balance at the end of the Month

Monthly Payment

Interest

Principal

   0

1,00,000.00

 

 

 

   1

   99,955.76

877.57

833.33

  44.24

   2

   99,911.16

877.57

832.96

  44.61

   3

   99,866.18

877.57

832.59

  44.98

   -

 

 

 

 

  - 

 

 

 

 

100

   93,135.76

877.57

776.96

100.61

101

   93,034.32

877.57

776.13

101.44

102

   92,932.04

877.57

775.29

102.28

  -

 

 

 

 

  -

 

 

 

 

300

   41,303.22

877.57

348.60

528.96

301

   40,769.84

877.57

344.19

533.38

  -

 

 

 

 

   -

 

 

 

 

358

   1,733.44

877.57

21.57

860.00

359

      870.32

877.57

14.45

863.12

360

                0

877.57

  7.25

870.32

Note: Each month, the interest payment is 1/12 of 10% of the mortgage balance at the end of the previous month. The principal payment is the total payment less interest. Total payment is the equated monthly payment calculated as
100,000 ¸ PVIFA(10/12,360).

Table 1 illustrates the break down of interest and principal components. At first, the mortgage payment is mostly interest and it gradually decreases as maturity approaches and on maturity, the payment is entirely the principal.

The amount of principal outstanding at any time is referred to as the mortgage balance. The amount of a home's value that is owned is referred to as homeowner's equity. The difference between the current market value of the home and the mortgage balance equals the homeowner's equity and as the mortgage balance declines, the equity rises.

Figure 1: Monthly Mortgage Payments - 

Interest/ Principal (30-year, 10% Conventional Loan)

785_monthly mortgage payment.png

Figure 2: Examples of Mortgage Balances for Various Loans

2336_monthly mortgage payment1.png

Figure 2 shows how the mortgage balance for several possible loans would decline over a time period.

Posted Date: 9/8/2012 7:32:26 AM | Location : United States







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

Write discussion on Traditional mortgages
Your posts are moderated
Related Questions
Q. Explain a variety of factors determining Dividend Policy? Dividend: - Dividend demotes to that part of net profits of a company which is distributed between shareholders as

Q. What is Installment Credit? This is another method by which the assets are purchased and the possession of goods is taken immediately but the payment is made in installments

State about the Net present value Net present value maximisation is superior to the profits maximisation as an operational objective. As a decision criterion, it involves a co

Capital structure theory: Use the following information to answer the questions: Case I: Capital structure theory ( no tax ) Case II: Capital struct

Role of Sponsor In the establishment of mutual fund trust, the main role is played by the sponsors. Both the trustees and the fund managers or the asset management company have

Q. Working Capital as a Percentage of Total Assets? This approach of estimation of working capital requirement is based on the fact that the total assets of the firm arc consis

What impact does high inflation have on the value of a business? Besides causing distortion (as it unequally affects all goods and services), inflation enhances the uncertainty

Discuss the applicability of an operating cycle in cabbage growing business in Uganda.

Gary and Joyce Yau, both 30, last month bought their dream house in London, Ontario. The purchase price was $450,000 plus addition fees such as taxes, legal fees, administration fe

Question : (a) The role of the Public Expenditure Management System (PEMS) is to allocate and use resources responsively, efficiently and effectively'. Briefly explain the abo