Transcript Document

Real Estate Principles
Ninth Edition
Real Estate:
An Introduction to the Profession
Ninth Edition
By Charles J. Jacobus
South-Western Publishing©2002
South-Western Publishing©2002
Chapter 14
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Types of Financing
Note the original presentation
has been edited by the presenter
South-Western Publishing©2002
Adjustable Rate Mortgage
What to look for?
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Interest rate
Margin
Adjustment period
Interest rate cap
Payment cap
Negative amortization
Disclosures
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Adjustable Rate Mortgage
• Index Rate
– Based on some publicly available index
• One-year US Treasury security
• Six-month Treasury Bill
• Cost of funds to thrift institutions
– Fed. Reserve publishes “1 year constant maturity”
• Disclosure required
– Historical example & Worst Case Scenario
– “the Consumer Handbook on ARMs”
Adjustable Rate Mortgages
For Borrower
• Usually lower interest
rate than fixed rate
• With lower rate
borrower can qualify for
larger loan
• BUT when interest rates
rise, payment rises
For Lender
• Allows lenders to better
match long term loan
interest rates to short
term deposits
• Teaser rates
• Negative amortization
may occur
Adjustable Rate Mortgages
ARM Example
• ARM starting at 7% increasing to 1% each
year for 5 years (maximum of 12%)
ARM Compare
• Loan remaining at 7% through term
Other Financing
• Equity Sharing & Shared Appreciation
Mortgage
– Lender receives part of the equity/appreciation
• “Rich Uncle” Loan
• Package Mortgage
– Including personal property in loan
• Graduated Payment Mortgage
– Basing loan repayment on expected salary increases
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Graduated Payment Mortgage
Example (with negative amortization)
Other Financing
• Blanket mortgage
– Loan that covers more than one property
• Reverse Mortgage
• Interim Loan & Construction Loan
– Builder “draws” payments as needed. Often high risk.
• Equity Loan
• Blended-Rate Loan
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Blended Rate
• Borrower does not qualify for 100% financing
• Takes out two loans
Affordable Housing Loans
• Underwriting standards are modified to
recognize different forms of credit
responsibility.
• Prepurchase home buyer education.
• Low down payment.
• Usually to first time home buyer
• Most are owner occupied
• Different credit criteria
Asset Integrated Mortgage
• Combines a home loan and a fixed insurance
annuity. Adds a “forced savings plan” to loan”
• Uses part of down payment to purchase an
annuity which is pledged as additional
collateral.
• Allows borrower to build a nest egg BUT the
after tax return is generally negative when
compared to a disciplined investment plan.
Comparison of
Conventional Mortgage to AIM
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Seller Financing
• The current owner of the property agrees to
accept part of the purchase price in the form of
a loan (promissory note and mortgage or deed of trust)
also becoming the lender in the transaction.
• Types
– Contract for Deed, Installment Contract or Land
Contract (title remains in Seller’s name)
– Lease with Option to Purchase
– Carry-back, Taking Back Paper and Wrap-around
1st Lender
Seller
Buyer
$20,000
Debt
$60,000
Debt
(Includes wrapped
$20,000)
Wraparound Mortgage
South-Western Publishing©2002
Using Equity
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Equity mortgage
Cash out refi
Sale Leaseback
Reverse annuity
mortgage (RAM)
Age
FMV
Loan Amt.
Monthly
65
75
$100,000
$100,000
$59,100
$68,900
$287
$390
Overly Creative Financing and
Purchase Techniques
• Brokers must advise seller/clients to get advice
concerning certain transactions.
• Brokers must submit all written offers,
however brokers must be aware that their
position of trust and confidence may not be
abused and should not take part in such
schemes
• Offers requiring Seller to subordinate their
interest in the property, taking bonds instead of
cash are to be scrutinized closely
Investing in Mortgages
1. Mortgage loan pools
a. Guaranteed by Ginnie Mae and Freddie Mac
b. May be sold prior to maturity
2. Direct purchase from Mortgage Broker or
from individual looking to borrow money
a. Higher yield
b. More risk
c. Check title and appraisal
Key Terms
• ARM
• Asset intergrated
mortgage
• Blanket mortgage
• Equity sharing
• GPM
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Negative amortization
Option
Package mortgage
RAM
Seller Financing
Wraparound mortgage
South-Western Publishing©2002