FN 310 – Chapter 9 – Flashcards

An adjustable rate mortgage typically offers a lower initial rate than a fixed-rate mortgage to compensate borrowers for incurring the interest rate risk. Meanwhile the fixed-interest rate locks down a certain rate does not change even when the market change. The cap on ARMs is to protect the borrowers but it can affect the financial institutions (lenders) because at times when the risk is too high they cannot charge the borrower the right interest that compensates for that because of that cap.

15-year mortgage is more attractive to homeowners because it gives the homeowners a shorter period (maturity) to pay back the principle and the with lower interest. The interest risk to financial institutions for a 30-year loan is higher than that of a 15-year loan because the longer the maturity the higher the default risk on that loan.

A balloon mortgage payment requires interest payments for a three- to five-year period. At the end of the period, full payment of the principle is required. Financial institutions may desire balloon mortgages because the interest rate risk is lower than for longer term, fixed-rate mortgages.

A graduated-payment mortgage allows the borrower to make small payments initially on the mortgage; the payments increase on a graduated basis over the first 5 to 10 years and then levels off. This type of mortgage is usually preferred by homeowners who anticipate a higher income as time passes.

A growing-equity mortgage requires continual increasing mortgage payments throughout the life of the mortgage. The mortgage lifetime is therefore reduced because of the accelerated payment schedule, whereas a GPM's life is not reduced.

This is usually offered by home sellers when the old mortgage is assumable and the selling price of the home is much higher than the remaining balance on the first mortgage. By doing so the home sellers makes the house more affordable and therefore more marketable.

A shared-appreciation mortgage allows home purchaser to obtain a mortgage at a below the market interest rate. Hence, the lender will share in the price of the house.

This impact is dampened because homeowners usually refinance their plan and take advantage of the lower interest rates.