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. Show the Graphic Presentation of Net Income Approach? Graphic Presentation of Net Income Approach: - Net Income approach is described graphically as follows: In the

Market participants' measure the default risk of an issue on the basis of the credit ratings that the credit rating agencies assign to the issues. Once rating is

Explain the Implicit cost of capital Implicit cost of capital can be defined as the rate of return associated with the best investment opportunity for the firm and its Shareho

There are two important term structure theories related to the shapes of the yield curve. First is the Expectations Theory and the second is Market Segmentations

ON THE BASIS OF FLEXIBILITY • Fixed budget: this is designed to stay unchanged irrespective of the volume of output or turnover attained.  The budget remains unchanged over

Analysing performance through ratios Ratios are an effective way of analysing financial statements. A ratio is 2 figures compared to each other and can either be in absolute te

Inventory is sometimes thought of as a necessary evil.  Explain. Inventory ties up funds and these types of funds are not earning an explicit return.  A few inventory is often es

What is the importance of leverage in business management of a small scale company

Concept and measurement of the cost of capital The evaluation of the worth of a long-term project suggests a certain norm or standard against which benefits are to be judged. R

Determine the example of Future Value of an Annuity An annual payment of 7000 $ is invested at 5% per annum compounded yearly. What will be the amount after 20 years? Solut