Fixed Rate

Mortgage Loans
CHAPTER 4
Team Members
ID Name

1920053 JAHIRUL ISLAM JOY

1920037 JUTHI DEVNATH

1920043 IBDETA TASNIM

1920051 MONIRUL ISLAM

1920054 MD. MUNNA HOSSEN

1920056 MD. KHAIRUL ISLAM

1920055 MD. ABDULLAH-AL-JIYAD

1920021 MST. MORIUM SULTANA

1920031 MORIUM KHATUN

1920030 MD. ABU RAYHAN

 • Mortgage Interest Rates
• Components of the Mortgage Interest Rate
• Constant Amortization Mortgage (CAM)
• Constant Payment Mortgage (CPM)
• CAM and CPM Payment Patterns

Contents • Computing a Loan Balance

• Loan Closing Costs
• Pricing a Loan
• Other Loan Patterns
• Partially Amortizing Loan
• Negative Amortization
• Option Mortgages
• Reverse Annuity Mortgage (RAM)
Mortgage Interest Rates
• What will borrowers pay for the use of funds?
• What are lenders willing to accept for the use of funds?
• Housing Demand Factors: Income & Demographics
• Mortgage Funds Supply Factors: Alternative Investments
Components of the Mortgage Interest Rate
• Real Rate of Interest
• Time Preference for Consumption
• Compensation to delay a purchase
• Production Opportunities in the Economy
• Competition for funds when there are other investment opportunities
• Inflation Expectation
• Retain purchasing power
Components of the Mortgage Interest Rate
• Default Risk
• Interest Rate Risk
• Anticipated Inflation and Unanticipated Inflation
• Prepayment Risk
• Liquidity Risk
• Legislative Risk
Components of the Mortgage Interest Rate

𝑖𝑡 =𝑟 1 +𝑝 1+ 𝑓 1
r = Real Rate
f1 = Inflation Rate
p1 = Risk Premiums
Mortgage Payment Patterns
• Constant Amortization Mortgage (CAM)
• Loan Amortization Remains the Same
• Monthly Payment Changes
• Constant Payment Mortgage (CPM)
• Loan Amortization Changes
• Monthly Payment Remains the Same
Mortgage Payment Patterns
• Example 4-1
• Calculating the Payment for a CPM
• $100,00 Mortgage
• 7% Interest
• 30 Years
• Monthly Payments
Mortgage Payment Patterns
= $100,000
PV
= 30 x 12 = 360
n
= $0
FV
=i 7/12 = .58333
(or change P/Y to 12 and enter 7)

PMT =?
Mortgage Payment Patterns
• Interest paid in the first month
• (.07/12) x $100,000 = $583.33
• Principal paid in the first month
• $665.30 - $583.33 = $81.96
• Every month, interest portion declines
• Every month, principal portion increases.
Mortgage Payment Patterns
• Comparing the CAM & CPM
• Higher initial monthly payments for the CAM
• More difficult for a borrower to qualify for a loan
• Amortization of CPM is slower than CAM.
• CAM payment declines over time.
Computing a Loan Balance
• Essentially “removing” the interest that was built into the payment.
• Two mathematical methods
• Compute the present value of the remaining payments.
• Compute the future value of the amortized loan amount.
Computing a Loan Balance
• There are 3 methods to do this with a financial calculator
• From Example 4-1, what is the future expected loan balance in 8 years?
Computing a Loan Balance
Present Value Method
= $665.30
PMT

=n22 x 12 = 264

= $0
FV
=i .07/12 = .0058333

PV =?
Computing a Loan Balance
Future Value Method
PV
= $0

= 8n
x 12 = 96

PMT
= $665.30

i
= .07/12 = .0058333
FV
=?
 Computing a
Loan Balance
Amortization
Method

• Opening Balance = Previous Period Ending Balance

• Interest = Opening Balance × Periodic Rate
• Periodic Rate = Annual Rate / Payment per Year

• Amortization = Original Loan Balance /Number of Payments

• Monthly Payment = Interest + Amortization
• Ending Balance = Opening Balance – Amortization
Loan Closing Costs
• Statutory
• Transfer
• Recording Fees etc.
• Third Party Charges
• Appraisals
• Surveys
• Inspections, etc.
Loan Closing Costs
• Additional Finance Charges
• Loan Origination Fees
• Cover origination expenses
• Loan Discount Fees – “Points”
• Used to raise the yield on the loan
• Borrower trade-off: points vs. contract rate
• 1 Point = 1% of the loan amount
Loan Fees & Borrowing Costs
• Calculating the effective interest cost
• Hypothetically, let’s say you have these info:
• $250,000 home
• 80% LTV Loan
• 8% Interest
• 4 Points
• 30 Years
The below screenshot is answers:
Below screenshot shows the formula used in above calculations:
Other Loan Patterns
• Partially Amortizing
• Balloon Payment
• Interest Only Loans
• Negative Amortization
• Reverse Annuity Mortgages
Thanks to all mates
for listening
carefully.