ASSIGNMENT- Mortgages & Home loans
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INTRODUCTION
A mortgage is an instrument of debt secured by collateral of specified real estate property, that the borrower is compelled to pay back with a calculated set of periodic payments. The periodic payments consist of both principal and interest, this is referred to as an amortized loan. Such payments pay the relevant interest expense for the period before any principal is paid and reduced. The table showing all the periodic payments, interests and balance for the whole period is referred to as an amortization schedule.
Application
Mostly it’s used to determine the periodic payments by creditors giving an overview of what is expected of the borrower.It can be used for advisory services to clients that may want to know what loan amount’s they qualify for considering the present market conditions and how they are going to pay with regards to the financing option they prefer.They can also be used to determine the credit worth of a client by how timely he makes the periodic payments or completes the payments. This is mostly when a borrower intends to take another loan, for example, a car loan or another mortgage.ADDITIONAL INFORMATION
Residential Property: 461 2nd St Apt 129 San Francisco, CA 94107
Cost of home worth $1,550,000 and 20% down payment of $310,000.
Interest rate: 3.78% (fixed rate mortgage) annually and 30 years.
TWO FINANCING OPTIONS THAT NEED TO BE COMPARED
Fixed vs. Floating Rate Mortgages
A fixed-rate mortgage is one which remains constant the whole period of the loan. The obvious benefit of getting a fixed-rate loan is that the borrower knows how much the monthly payments’ will be for the entire loan period and are equally spread.
Floating-rate mortgage, also referred to as an adjustable-rate mortgage, is one where the rate keeps changing as it’s affected directly by the market environment. Floating-rate loans usually allow the borrowers to obtain lower introductory rates during the initial few years of the loan, allowing them to qualify for a larger loan than if they had tried to get a more expensive fixed-rate loan. Although the benefit can be great, they entail a substantial risk for borrowers whose income does not grow in step with the change in interest rate. The other demerit is that mostly, the rate change is unknown at the outset of the loan because it is usually pegged to some market rate that is determined in the future.
CONCLUSIONWhen looking for a mortgage home, there are a few things that can be done to minimize the difficulty of sorting through all the financing options. The best approach is to put some time into deciding how much home one can actually afford and then finance accordingly. Homeowners who can afford to put a substantial amount down or who have enough income to create a high coverage rate will have the most negotiating power with lenders and the most financing options. Those who push for the largest loan will undoubtedly receive a higher risk-adjusted rate and then may have to deal with adjustable-rate mortgages and private mortgage insurance.
Link for amortization schedules in excel sheet:
Excel sheet of amortization schedules.xlsx
REFERENCES
Morcos, A. (2017). realtor.com. Retrieved June 10, 2017, from realtor.com: http://www.realtor.com/realestateandhomes-detail/461-2nd-St-Apt-129_San-Francisco_CA_94107_M28405-62551Stammers, Robert. (2017, January 31). Investopedia. Retrieved June 10, 2017, from Investopedia: http://www.investopedia.com/articles/mortgages-real-estate/08/homebuyer-financing-option.asp#ixzz4jZajfGoW[Button id=”1″]
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