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Mortgage banking overview
 

Mortgage banking overview

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Mortgage Banking Seminar is part of the continuing series of training presentations for the Financial Services Industry. Check out our other presentations in this series and contact Saunders Learning ...

Mortgage Banking Seminar is part of the continuing series of training presentations for the Financial Services Industry. Check out our other presentations in this series and contact Saunders Learning Group if you have training needs. We can help, we have been doing training in the financial services industry for 30 years.

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  • Fannie Mae or Federal National Mortgage Association (FNMA) is a government-sponsored enterprise (GSE) that was created to expand the flow of mortgage money by creating a secondary mortgage market. Fannie Mae is a publicly traded company which operates under a congressional charter that directs Fannie Mae to channel its efforts into increasing the availability and affordability of homeownership for low-, moderate- and middle-income Americans.Freddie Mac or Federal Home Loan Mortgage Corp (FHLMC) is a stockholder-owned, government-sponsored enterprise (GSE) chartered by Congress to keep money flowing to mortgage lenders in support of homeownership and rental housing for middle income Americans. The FHLMC purchases, guarantees and securitizes mortgages to form mortgage-backed securities. The mortgage-backed securities that it issues tend to be very liquid and carry a credit rating close to that of U.S. Treasuries.
  • Reasons for Non-Conforming Loan: ‪Loan-to-Value Ratio ‬(LTV): Represents the percentage of the home's purchase price that you pay for with a mortgage. If the home costs $100,000, and you take out a mortgage of $80,000, the LTV ratio is 80%. Anything higher than a 90% LTV ratio may disqualify you for a conforming loan.‪Credit Score ‬and History: Borrowers need to have a solid credit history, reflected by a credit score of at least 620. A lower credit score may disqualify you from getting a conforming loan.Documentation Problems: Conforming loans require complete documentation of employment history, income, and assets. If you can't provide all of this documentation, you may not qualify for a conforming loan.Total Debt: If your total debt load is very high, you may have trouble getting a conforming loan.Recent Bankruptcy: Borrowers who are recovering from a recent bankruptcy (within the past two years) may not be able to secure a conforming loan.‪Debt-to-Income Ratio ‬(DTI): If your monthly mortgage , insurance, taxes, and other consumer debt payments add up to more than 45% of your monthly pre-tax income, you may not qualify for a conforming loan.
  • This is the most common type of residential home loan. It is repaid through fixed monthly payments of principal and interest over a set term. The borrowing rate stays the same over the life of the residential mortgage loan.The term of the home mortgage can be 10, 15, 20 or the popular 30 year fixed rate mortgage term. The way fixed mortgage loans are structured, the mortgage interest is front loaded. In the first years of the residential loan, the bulk of the monthly payments go to paying mortgage interest. It’s only later that you will start significantly building equity in your home as more of your mortgage payments go towards paying down the mortgage loan principal.A fixed rate mortgage is ideal for those who intend to stay in their properties for a long time. MeritsRepayments stay the same regardless of interest rate increases.Easier to budget because repayments do not change. DemeritsRepayments do not decrease when interest rates decrease.You can’t pay off lump sums or increase your monthly repayments.If you switch mortgage to a different rate, to a different provider or repay it early you may owe a fixed rate penalty
  • Advantages Stability: With your mortgage rates fixed, the loan period set, you know what your mortgage payment will exactly be for the whole life of the residential loan. Given the certainty of your mortgage loan payment, you can plan your finances accordingly.Lower payments in a low mortgage interest rates environment: A lower monthly mortgage payment frees up your purchasing power and gives you greater financial flexibility. Using a 30 year fixed mortgage of $150,000 as an example, if the borrowing rate is 6.50%, the monthly payment would be $948.10. If the mortgage interest rate is 8.50%, the mortgage monthly payment would amount to $1,153.37. The difference in monthly payments is $205.27.DisadvantagesAffordability: If mortgage interest rates are high, you might have difficulty making the high mortgage payments. The home loan in this situation might not be approved.High payments in a high mortgage rate environment: Nobody wants to be saddled with high home mortgage payments over the long term. When borrowing rates are lower, you can refinance your mortgage. A refinance mortgage is the process of replacing your current mortgage with a new residential mortgage with better borrowing terms
  • The adjustable rate mortgage or ARM is a combination of a fixed rate mortgage and a floating rate mortgage. At the beginning of the mortgage term, the mortgage rate is fixed for certain periods. These periods could be for 3, 5, 7 or 10 years. After this period expires, the mortgage interest rate becomes adjustable. A popular ARM home loan is the 5/1 ARM Mortgage. Five denotes that the period and the borrowing rate are initially fixed for 5 years. After the fifth year, the mortgage rate becomes adjustable.Some ARM home loans come with options to convert them to a fixed rate mortgage based on a pre-determined formula, during a given time period. Example: the 1-year treasury bill adjustable may be converted to a fixed mortgage rate during the first five years on the adjustment date. Meaning, you have the option to convert during the 13th, 25th, 37th, 49th and 61st months of the mortgage loan.
  • Advantages:Teaser Rate: This is the starting interest rate of the arm adjustable rate mortgage. It is usually referred to as the teaser rate, since it is lower than the fully indexed rate.The initial low mortgage rate is used to attract people. An arm mortgage is ideal for people who intend to stay in their homes for no more than 5 to 7 years. The benefits of an arm are realized at the beginning. Affordability: If current mortgage rates this may be the only option available to you. You may have a better chance of getting the home loan since the lender incorporates the gross monthly income and the monthly loan payment amount to determine how much you qualify. The monthly amount will be less with a lower interest rate so you might qualify for more.Interest rates have peaked: By going with an adjustable rate mortgage arm at the peak of the interest rate cycle, the successive rates will be lower as interest rates go down. Your monthly home mortgage payments may be lower. DisadvantagesComplicated to understand: Unlike a fixed rate mortgage that is simple to understand, there are many variables that go into calculating adjustable rate mortgage loans.Interest rates have bottomed out: By going with an adjustable rate mortgage arm at the bottom of the interest rate cycle, successive borrowing rates will likely go higher as interest rates go down. Your monthly mortgage payments will become less affordable. Uncertainty: If you plan to be at your property for more than 7 years, you will be dealing with the uncertainty associated with an ARM mortgage. After each adjustment period, you will bet getting new mortgage payments.
  • An interest only home mortgage features no payments of principal made at the beginning of the home loan. The monthly payments consist only of mortgage interest only. Due to the lower monthly mortgage payments, you qualify for a bigger residential loan. An interest only home mortgage allows you to buy more home while keeping your monthly mortgage payments low.The interest only payments do not go on for the whole term of the home loan mortgage. Interest only mortgage payments periods range from 1 year up to half the term of the mortgage loan. Interest only loan mortgages are available in adjustable rate mortgage format and fixed mortgage format.After the interest only payment is over, you will begin making payments on your mortgage principal. Your monthly mortgage payment will go up considerably. For example, you took out a 15/30 year interest only mortgage. After the 15th year, the principal balance will be amortized over 15 years. With a $175,000 home loan with a mortgage borrowing rate of 6.50%, the interest only monthly payment is $947.92. When the principal payments kick in after the 15th year, the mortgage monthly payment jumps to $1,524.44.

Mortgage banking overview Mortgage banking overview Presentation Transcript

  • Financial Services Industry Training Mortgage Banking and Mortgage Backed Securities Investing Seminar Materials covers chapter 11 of “Figuring Out Wall Street” Saunders Learning Group, LLC Saunders Learning Group, LLC, Andover, KS
  • Training from Saunders Learning Group Saunders Learning Group provides a variety of training programs, workshops and seminars targeted to the financial services industry. Programs are available in a wide range of topics, and we are specialists in developing custom programs that are targeted to your needs. Contact the founder, Floyd Saunders at 316-680-6482 or at floyd@floydsaunders.com for more information. Saunders Learning Group, LLC, Andover, KS1
  • All About Figuring Out Wall Street ... Everything has changed in the financial services industry and it effects your financial well-being. From bank failures, to record unemployment, home foreclosures and panic around the world, Figuring Out Wall Street, is the concise guide to help everyone from first time investors to veterans of banking understand what to do to persevere and restore our faith in our financial systems.This presentation is from Chapter Nine of Figuring Out Wall Street Saunders Learning Group, LLC, Andover, KS 2
  • MORTGAGE BASICSSaunders Learning Group, LLC, Andover, KS
  • What is Mortgage An amortized loan whereby a fixed payment pays both principal and interest each month A mortgage is a loan to finance the purchase of real estate, usually with:  specified payment periods  and interest rates which is paid to the bank  secured by the property to loan is used to purchase .  The borrower (mortgagor) gives the lender (mortgagee) a lien on the property as collateral for the loan. Mortgages involve two main parties: the borrower and the lender.  the borrower requires money in order to purchase the property  the lender loans them the money at a certain price.  the loan is to be paid in instalments in a definite amount of time.  If borrower fails to pay back the loan amount, the lender can recover the money by selling his asset. Thus the property becomes the lenders security on the loan The actual loan amount is referred to as the principal, and the mortgagor is expected to repay that principal, along with interest, over the repayment period of the mortgage. Saunders Learning Group, LLC, Andover, KS
  • What is Mortgage A mortgage can be used for financing many different things, including:  Purchasing or constructing a new house.  Purchasing an existing house.  Refinancing to consolidate debts.  Financing a renovation.  Financing the purchase of other investments.  Financing the purchase of investment property. Since a mortgage is a fully secured form of financing, the interest you pay is usually less than with most other types of financing. Saunders Learning Group, LLC, Andover, KS
  • A Brief History Mortgages were used in the 1880s, but massive defaults in the agricultural recession of 1890 made long-term mortgages difficult to attain. Until post-WWII, most mortgage loans were short-term balloon loans with maturities of five years or less. Balloon loans, however, caused problems during the depression. Typically, the lender renews the loan. But, with so many Americans out of work, lenders could not continue to extend credit. As a part of the depression recovery program, the federal government assisted in creating the standard 30-year mortgage we know today. The U.S. government established the Federal National Mortgage Association (FNMA or Fannie Mae) in the 1930s to buy mortgages from thrifts so they could make more mortgage loans, this created a “secondary market” for mortgages. FHA and VA insured loans make securitization easier Government National Mortgage Association (GNMA or “Ginnie Mae”) and Federal Home Loan Mortgage Corp. (FHLMC or “Freddie Mac”) created in the 1960s  encouraged continued expansion of the housing market  provided direct and indirect guarantees that allow for the creation of mortgage-backed securities Saunders Learning Group, LLC, Andover, KS
  • What is Mortgage Company A mortgage company is a company engaged in the business of originating and/or funding mortgages for residential or commercial property. This is a type of regulated lender that specifically lends money for people to purchase "Real Property" (homes). A Mortgage bank specializes in originating and/or servicing mortgage loans. A mortgage broker acts as an intermediary whose brokers mortgage loans on behalf of individuals or businesses. A mortgage bank is a state-licensed banking entity that makes mortgage loans directly to consumers.  The difference between a mortgage banker and a mortgage broker is that the mortgage banker funds loans with its own capital. Saunders Learning Group, LLC, Andover, KS
  • Mortgage Company  Provides consumers with a wide range of mortgage products and services designedFunction to meet the needs of a varied customer base.  Invest in residential, commercial and multifamily loans.  Provide services to lenders with regard to assets and credit risk  May be involved in the management of real estate transactions.  Some mortgage holding companies also offer mortgage servicing products as well as mortgage management.Example  Main functions of Mortgage companies/banks are:Activities  Solicitation of new loans  Origination of new loans (applications and verification of income, credit, property value, employment status etc.  Loan Servicing  Asset Management  Regulatory Consulting  Loss Mitigation  Citibank, Bank of America, JPMorganChase, Wells Fargo, US Bank Example Also a variety of regional and local banks.  Credit Unions perform similar functions, provide most of the same products andCompanies services. Saunders Learning Group, LLC, Andover, KS
  • Mortgage Banking Functions Mortgage Banking Loan Origination Loan ServicingProvides consumers with a wide range of Processes payments, adjustments, collects fundsmortgage loan products, to pay property taxes and insurance, arranges for payoff or transfer of loans Application Payment Processing Processing (or Underwriting) Escrow Accounts Loan Closing Loan payoffs Saunders Learning Group, LLC, Andover, KS
  • Mortgage Loan Origination  Provides consumers with a wide range of mortgage products and servicesFunction designed to meet the needs of a varied customer base.  Most mortgage originations occur in-house or with a mortgage broker.  Mortgage brokers, on the other hand, will help customers find a variety of mortgage loan choices and take applications to start the underwriting process.  Mortgage banks will take an application for a potential customer, review hisExample qualifications--credit, income, assets--and determine the best productActivities offered by that bank only.  Next an in-house underwriter (another bank employee) will corroborate the information on the application with the help of supporting documents (pay stubs, W2s).  Arrange for property appraisals, inspections and title searches to  Pre-approval and approval meetings are often held with both the underwriter and the loan officer as well as the customer.  Mortgage brokers will almost always sell a mortgage in the secondary market after underwriting and origination processing is complete.  Citibank, Bank of America, JPMorganChase, Wells Fargo, US Bank Example Also a variety of regional and local banks.Companies  Credit Unions perform similar functions, provide most of the same products and services. Saunders Learning Group, LLC, Andover, KS
  • Steps in Loan Origination Stage 6 Closing Loan documents signed and recordedSaunders Learning Group, LLC, Andover, KS
  • Typical Loan Decision Process Saunders Learning Group, LLC, Andover, KS
  • Current U.S. Mortgage Requirements Credit Scores — A credit score of 600 or higher for FHA loans, and 620 or higher for conventional mortgages. Down Payments — A veteran or VA loan does not require a down payment. With an FHA the down payment could be as low as 3.5%. Conventional mortgages generally require a down payment of at least 5%, and often 20%. Debt Ratios — Lenders are concerned with your combined debt ratio (a comparison between monthly earnings and debt expenditures). Generally not more of 45% of your income to cover your debts (including the new mortgage payment). Funds for Closing — Your lender will check your bank account to make sure you have enough money to cover your closing costs. There are the various fees and charges you’ll accrue during the home-buying process. You may need to have these funds on deposit for at least 60 days in advance of loan closing. Employment — Many lenders want to see at least two years of steady employment, documented with W-2s and paystubs. Documents — As of 2012, documentation requirements became more stringent These include federal tax returns for the last two years, bank statements, pay stubs, employment letters and a list of any other assets you have. Most lenders today want the tax records to be sent directly from the IRS Cash Reserves —Some leaders require extra money in the bank at closing, theoretically earmarked for your first few mortgage payments. Other lenders only care that you have enough to cover your down payment and closing costs. Saunders Learning Group, LLC, Andover, KS
  • Loan Qualification Saunders Learning Group, LLC, Andover, KS Slide 14
  • Mortgage Interest Rates Lenders typically match the interest rate on a mortgage to an index like 10 year treasury bonds.More recently, the FederalReserve has started aprogram of buying upmortgages and treasuriesto pump more money intothe markets and keepinterest rates low. Saunders Learning Group, LLC, Andover, KS
  • Mortgage-Lending Institutions Saunders Learning Group, LLC, Andover, KS
  • Mortgage Loan Servicing  Provides mortgage bankers with the ability to service mortgage loans,Function handle escrow accounts, property tax payments and insurance coverage.Activities Example  Citibank, Bank of America, JPMorganChase, Wells Fargo, US BankCompanies Also a variety of regional and local banks. Saunders Learning Group, LLC, Andover, KS
  • Loan Servicing Most mortgages are immediately sold to another investor by the originator. This frees cash to originate another loan and generate additional fee income. Still, someone has to collect the monthly payments and keep records. This is knows as loan servicing, and servicers usually keep a portion of the payments received to cover their costs.There are three elements in the life of a mortgage loan:  The originator packages the loan for an investor  The investor holds the loan  The servicing agent handles the paperwork Saunders Learning Group, LLC, Andover, KS
  • Asset ManagementThe asset management department within a mortgage holding company measurescredit risk on residential loans by assessing a variety of factors. This division screenspotential borrowers and keeps an eye on acquisitions to limit asset risk.It also make investments in mortgage loans and securities backed by mortgages.Employees in the asset management area of a mortgage holding company gatherinformation about a loan, as well as the property, in order to make a completeevaluation of the asset.They compile borrower information to develop strategies for exit plans for unsuccessfulloans. Saunders Learning Group, LLC, Andover, KS
  • Regulatory Consulting Mortgage holding companies provide financial institutions with regulatory consulting services to support company growth and profitability. This consulting may include creating management services and solutions. The client companys needs are assessed to provide workable solutions, and the mortgage holding company may provide services such as technology analysis, contract liability and forensic review. Financial institutions that benefit from these services include banks and hedge funds. Consulting is sometimes provided through the mortgage holding companys affiliates and subsidiaries. Saunders Learning Group, LLC, Andover, KS
  • Loss Mitigation Mortgage holding companies provide loss mitigation through the use of plans designed to limit a lenders loss. One function of a loss mitigation division is to analyze a borrowers ability to retain property by creating a portfolio containing borrower information, which helps the bank decide whether the homeowner can continue to pay his mortgage. If the mortgage holding companys loss mitigation division concludes that the homeowner can continue to make payments, loss mitigation services may also include refinancing, loan modification approval and preparation of appropriate documents. In the event that the division determines that the borrower is unable to keep the home, loss mitigation can provide short sale approval, streamlined short sales and "cash for keys" services to speed up or avoid the foreclosure process. Saunders Learning Group, LLC, Andover, KS
  • TYPES OF MORTGAGE LOANSSaunders Learning Group, LLC, Andover, KS
  • Primary Mortgage Market Four basic types of mortgages are issued by financial institutions  home mortgages are used to purchase one- to four-family dwellings  multifamily dwellings mortgages are used to purchase apartment complexes, townhouses, and condominiums  commercial mortgages are used to finance the purchase of real estate for business purposes  farm mortgages are used to finance the purchase of farms Saunders Learning Group, LLC, Andover, KS
  • Conventional Mortgage Loans A type of mortgage in which the underlying terms and conditions meet the funding criteria of Fannie Mae and Freddie Mac. About 35-50% of mortgages in the United States, depending on market conditions and consumer trends, are conventional mortgages. In other words, Fannie Mae and Freddie Mac guarantee or purchase 35-50% of all mortgages. Conventional mortgages may be fixed-rate or adjustable-rate mortgages. Conventional Mortgage Loans are eligible to be resold by the loan originator in the secondary mortgage markets. Saunders Learning Group, LLC, Andover, KS
  • Non-Conforming LoansNon-conforming loans are offered to borrowers who do not qualify for conforming loans. Though they are the onlyborrowing option for some home buyers, they typically have higher interest rates, and may carry additionalupfront fees and insurance requirements. Loans can be non-conforming for several different reasons. The best-known type of non-conforming loan is the jumbo loan.  Jumbo Loans  Jumbo loans are too large to meet the guidelines of a conforming loan. For example, if you are buying a home and the conforming loan limit is $417,000, but need a single mortgage for $500,000, it would be jumbo loan. As jumbo loans do not meet the standards of a conforming loan, they are more difficult to sell on in the secondary market.  Reasons for Non-Conforming Loan:  Loan-to-Value Ratio (LTV).  Credit Score and History.  Documentation Problems.  Total Debt.  Recent Bankruptcy.  Debt-to-Income Ratio (DTI) Saunders Learning Group, LLC, Andover, KS
  • Federal Home Administration The Federal Housing Administration, or "FHA", provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. FHA insures mortgages on single family and multifamily homes including manufactured homes and hospitals. It is the largest insurer of mortgages in the world, insuring over 34 million properties since its inception in 1934. An FHA refinance mortgage or FHA loan allows for the refinance or purchase of a home with a low down payment. These loans are great for the first-time homebuyer. Saunders Learning Group, LLC, Andover, KS
  • Types of Mortgages The two basic types of Mortgages are :  Fixed Rate Mortgage  The Adjustable Rate Mortgage (ARM) While the marketplace offers numerous varieties within these two categories, the first step when shopping for a mortgage is determining which of the two main loan types - the fixed-rate mortgage or the adjustable-rate mortgage - best suits your needs. Other types of Mortgages are :  Interest Only Mortgage  Biweekly Mortgage  Two step Mortgage  Federal Housing Authority (FHA) Mortgage  Veterans Affairs Loan Saunders Learning Group, LLC, Andover, KS
  • Fixed Rate Mortgage This is the most common type of residential home loan. It is repaid through fixed monthly payments of principal and interest over a set term. The borrowing rate stays the same over the life of the residential mortgage loan. Merits  Repayments stay the same regardless of interest rate increases.  Easier to budget because repayments do not change. Demerits  Repayments do not decrease when interest rates decrease.  You can’t pay off lump sums or increase your monthly repayments.  If you switch mortgage to a different rate, to a different provider or repay it early you may owe a fixed rate penalty Saunders Learning Group, LLC, Andover, KS
  • Fixed Rate Mortgage Advantages Disadvantages Stability: With your mortgage rates fixed, the loan  Affordability: If mortgage interest rates are period set, you know what your mortgage high, you might have difficulty making the high payment will exactly be for the whole life of the mortgage payments. The home loan in this residential loan. situation might not be approved.  Using a 30 year fixed mortgage of $150,000 as an  High payments in a high mortgage rate example, if the borrowing rate is 6.50%, the environment: Nobody wants to be saddled monthly payment would be $948.10. with high home mortgage payments over the  If the mortgage interest rate is 8.50%, the long term. mortgage monthly payment would amount to $1,153.37.  The difference in monthly payments is $205.27. Saunders Learning Group, LLC, Andover, KS Slide 15
  • Adjustable Rate Mortgage The adjustable rate mortgage or ARM is a combination of a fixed rate mortgage and a floating rate mortgage. At the beginning of the mortgage term, the mortgage rate is fixed for certain periods. These periods could be for 3, 5, 7 or 10 years. After this period expires, the mortgage interest rate becomes adjustable. Saunders Learning Group, LLC, Andover, KS
  • The Adjustable Rate Mortgage (ARM)There are several components that go into calculating the ARM mortgage. • The market derived interest rate which is used as a base to set future rates of the ARM mortgage loan. Depending on the index chosen, the rate could be adjusted Index: monthly, quarterly, semi-annually or annually. The index could be pegged to the following: Treasury Bill Rates, The Prime Rate, Libor and 6 month CD. • This is the spread added to the index to determine the actual rate charged to the Margin: mortgage borrower. Example: Index is based on One Year Treasury Bills 3%. The margin is 2%. The mortgage rate the borrower pays is 5%. Rate = Index Rate + Margin. • This is the duration for which the mortgage interest rate is fixed. If the adjustment Adjustment period is one year, then the interest rate will remain fixed for one year, after which Period: time it will adjust. • This is the maximum the interest rate can adjust either up or down for each Adjustment Cap: adjustment period. Example: The adjustment cap is 1 point. The index based interest rates since the last adjustment period went up 1.5 points. • The maximum mortgage interest rate charged over the duration of the arm mortgage loan. The cap can be as high as 6%. The cap is based on the interest rate from the first Lifetime Cap: year adjustment period. The rate is 5%. The highest the mortgage interest rate can go is 11% (Base Rate + Lifetime Cap). Saunders Learning Group, LLC, Andover, KS
  • The Adjustable Rate Mortgage (ARM)As interest rates remain at record low rates, more people select a fixed-rate loan, as they will be more affordable.An ARM is more attractive when interest rates are rising, you can still qualify for a mortgage, and plan for a rateincrease if it happens. Saunders Learning Group, LLC, Andover, KS
  • The Adjustable Rate Mortgage (ARM) Merits  Repayments may fall when interest rates fall.  You can increase your repayments.  You can pay off lump sums.  You can apply for a payment break/ holiday.  The margin is less on a tracker rate or LTV rate when your LTV is lower. Demerits  Repayments may increase when interest rates increase.  More difficult to budget for repayments because of uncertainty with rates. Saunders Learning Group, LLC, Andover, KS
  • Adjustable Rate Mortgage Advantages Disadvantages Teaser Rate: This is the starting interest rate of the arm  Complicated to understand: Unlike a fixed rate adjustable rate mortgage. It is usually referred to as the mortgage that is simple to understand, teaser rate, since it is lower than the fully indexed rate.  Interest rates have bottomed out: By going with an Affordability: If current mortgage rates this may be the adjustable rate mortgage arm at the bottom of the only option available to you. interest rate cycle, successive borrowing rates will likely go higher as interest rates go down. Interest rates have peaked: By going with an adjustable rate mortgage arm at the peak of the interest rate  Uncertainty: If you plan to be at your property for more cycle, the successive rates will be lower as interest than 7 years, you will be dealing with the uncertainty rates go down. associated with an ARM mortgage. Saunders Learning Group, LLC, Andover, KS
  • Interest Only Mortgage An interest only home mortgage features no payments of principal made at the beginning of the home loan. The monthly payments consist only of mortgage interest only. Due to the lower monthly mortgage payments, you qualify for a bigger residential loan. After the interest only payment is over, you will begin making payments on your mortgage principal. Your monthly mortgage payment will go up considerably.  For example, you took out a 15/30 year interest only mortgage.  After the 15th year, the principal balance will be amortized over 15 years.  With a $175,000 home loan with a mortgage borrowing rate of 6.50%, the interest only monthly payment is $947.92.  When the principal payments kick in after the 15th year, the mortgage monthly payment jumps to $1,524.44. Saunders Learning Group, LLC, Andover, KS
  • Interest Only Mortgage Saunders Learning Group, LLC, Andover, KS
  • Interest Only Mortgage Advantages Disadvantages Lower mortgage payments  Income Risks: There are no assurances that The lower monthly mortgage payments let you your income will rise fast enough to cover the purchase a home where a fixed mortgage loan higher monthly mortgage payments. would not.  Property Risks: Instead of the property rising  You get to jump on the housing bandwagon fast enough to pay off your interest only home Free up cash to invest the money elsewhere mortgage, it could stay at current levels or even Instead of using the cash to pay down your drop. mortgage principal, you can invest in other As a result, you might require another loan just vehicles such as stocks and mutual funds to settle the interest only mortgage loans. generate a superior return.  No guarantee of getting superior returns in other investments: If you used the money to generate returns in investments such as equities and mutual funds, there is no guarantee you’ll make money. Saunders Learning Group, LLC, Andover, KS Slide 24
  • Biweekly Mortgage In Biweekly Mortgage, mortgage payments are made every two weeks. The amount paid is half of what your monthly mortgage payment would be. On an annualized basis, there are two extra payments in a year. You will be making 26 biweekly mortgage payments instead of 24 payments. A biweekly mortgage program has you paying down your principal mortgage earlier. As a result, you’ll save significant amounts in mortgage interest and pay off your home mortgage years earlier.  Example: 30 year fixed mortgage $175,000 Interest Rate: 6.75% By opting for a biweekly mortgage payment plan for this mortgage, you will be saving $54,257.52 in mortgage interest.  Your mortgage will be paid off 5 years 9 months earlier. Saunders Learning Group, LLC, Andover, KS
  • Biweekly Mortgage Saunders Learning Group, LLC, Andover, KS
  • Two Step Mortgage A two step mortgage is essentially a 30 year mortgage with special features: Convertible or non-convertible. These mortgage loans are also known as 5/25s and 7/23s.  The 5/25s has a fixed interest rate for the first five years and then switches to either a 25 year fixed mortgage rate or a 1 year adjustable mortgage rate.  The 7/23 has a fixed interest rate for the first seven years and then converts to a 23 year fixed or a 1 year adjustable. The starting home loan rate is lower than a 30-year fixed. However, it is higher than a 1-year ARM mortgage. This type of residential mortgage is less risky than a mortgage ARM initially since the adjustment interval is longer. Saunders Learning Group, LLC, Andover, KS
  • Other Types of Mortgages Automatic rate-reduction mortgages Graduated-payment mortgages (GPMs) Growing-equity mortgages (GEMs) Second mortgages and home equity loans Shared-appreciation mortgages (SAMs) Equity-participation mortgages (EPMs) Reverse-annuity mortgages (RAMs)Saunders Learning Group, LLC, Andover, KS
  • MORTGAGE TERMS TO KNOWSaunders Learning Group, LLC, Andover, KS
  • Common Mortgage Terms Annual percentage rate (APR)-The actual cost of borrowing money, expressed in the form of an annual rate to make it easier to compare the cost of borrowing money among several lenders or sellers on credit. The APR includes all the financing costs of a mortgage, including points, origination fees and other finance charges and the mortgage interest. Point-A fee or charge equal to one percent (1%) of the principal amount of the loan which is collected by the lender at the time the loan is made. It is collected only once. Generally the lower the interest rate, the more points youll pay. PITI – Principal, interest, taxes, insurance. The total monthly payment if fully amortized. PITI also used to calculate reserve requirements for asset documentation . LTV – Loan to Value – Percentage of a homes value owed on a mortgage. CLTV – Combined Loan to Value – This is the total percentage of a home’s value owed on all mortgages combined Saunders Learning Group, LLC, Andover, KS
  • Common Mortgage Terms DTI – Debt to Income Ratio – Represented as a percentage, this is the ratio between debts and income. Amortize-Paying off a debt by making regular instalment payments over a set period of time, at the end of which the loan balance is zero. Deed-A legal document under which ownership of a property is conveyed. 3-Day Right of Rescission – A period of 3 full business after the signing of a mortgage that the borrower has to rescind, or change his mind, and cancel the loan without any negative consequences. Saunders Learning Group, LLC, Andover, KS
  • Questions Saunders Learning Group, LLC, Andover, KS
  • Post Workshop Action Plan  Complete the Post Workshop Action Plan Saunders Learning Group, LLC, Andover, KS46
  • Summary of Book Figuring Out Wall Street Consumer’s Guide To Financial Markets By Floyd Saunders Publisher: Saunders Learning Group ISBN: 978-0-9824019-0-3 available from Amazon, B&N, and http://www.figuringout wallstreet.com or www.floydsaunders.com Author Contact email: floyd@floydsaunders.com Blog: www/money/floydsaunders.com Twitter @floydsaunders Facebook: Figuring Out Wall Street Sideshare: http://www.slideshare.net/FloydSaunders Book summary: From bank failures to home foreclosures and panic around the world, Figuring Out Wall Street, is the concise guide to help everyone understand how this latest crisis happened, who was responsible and what to do now to restore our financial systems. Written in an easy to understand manner, even the most complex financial concepts are easy to digest. This book provides help to monitor investments with a review of investment products, financial regulators and economic indicators. Learn how the stock market exchanges work and the world of investment banking, hedge funds, venture capital and private equity. Every chapter includes action plans for investing. Saunders Learning Group, LLC, Andover, KS
  • About the Presenter/Author  Floyd Saunders has worked on Wall Street with both Bank of America and JPMorgan, where is was a vice president in global financial systems. He has worked across the industry in retail, commercial, and investment banking.  He has taught courses in Money and Banking and extensively for the American Institute of Banking and various colleges.  As a consultant, he developed and taught a wide range of banking and investing courses.  He authored three programs for the American Bankers Association: Banking on Mutual Funds and Annuities, Introduction to Securities Markets and Investing in Securities. Saunders Learning Group, LLC, Andover, KS