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The Mortgage Markets Main Contents What Are Mortgages? Secondary Mortgage Market What Are Mortgages? A long-term loan secured by real estate to mainly finance residential home purchases Mortgage Interest Rates The stated rate on a mortgage loan is determined by three factors: Market Rates: general rates on Treasury bonds Term: longer-term mortgages have higher rates Discount Points: a lower rates negotiated for cash upfront Mortgage: Loan Terms Collateral: usually the real estate being finance Down payment: a portion of the purchase price paid by the borrower PMI: insurance against default by the borrower Qualifications: includes credit history, employment history, etc., to determine the borrowers ability to repay the mortgage as specified in the contact Mortgage: Loan Amortization Calculations Questions 1 Using equal principal method instead of equal principal and interest method to calculate Questions 2 If the loan had been financed for 15 years instead of 30, how much would the borrower pay monthly? Questions 3 If interest rate will change from 8.5% to 9.3% at the end of second year, how much will the borrower pay monthly? Questions 4 If interest rate changed from 8.5% to 9.3% at the end of second year, furthermore, the borrower wanted to prepay the loan at the end of the 36th month, how much would the borrower pay? Questions 5 The discount point decision A difficult decision when getting a mortgage is whether to pay points (cash) upfront in exchange for a lower interest rate on the mortgage. The discount point decision: an example Suppose you had to choose between a 12% 30-year mortgage or a 11.5% mortgage with 2 discount points. Which should you choose? Assume you wished to borrow $100,000. First, examine the 12% mortgage. Using a financial calculator, the required payments is: n = 360, i = 1.0, PV = 100,000, Calculate the PMT. PMT = $1,028.61 Now, examine the 5.5% mortgage. Using a financial calculator, the required payments is: n =