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Mortgage Basics

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Mortgage Basics

  1. 1. MORTGAGES 101 A COURSE FOR FRONT-LINE EMPLOYEES OF FINANCIAL INSTITUTIONS
  2. 2. COURSE INTRODUCTION Has a client ever asked you a question about mortgage loans that left you feeling stumped? This course is designed to take some of the mystery out of mortgage loans so you can answer basic questions with confidence, help clients with understanding how their payments are calculated and how to recognize referral opportunities.
  3. 3. COURSE INTRODUCTION At the end of this course is a knowledge check to see what you learned about mortgage basics. Let’s begin!
  4. 4. OBJECTIVES By the end of this course you will be able to: • Describe what a mortgage loan is • Understand who benefits from mortgages and homeownership • Explain the different types of mortgages
  5. 5. OBJECTIVES, CONT. By the end of this course you will be able to: • Understand key advantages and disadvantages of each mortgage type • Describe the parts of a mortgage payment • Describe some key factors/costs associated with mortgage loans
  6. 6. What is a mortgage?
  7. 7. IN OTHER WORDS… It’s like an auto loan …on STEROIDS!
  8. 8. Who benefits from mortgages? EVERYONE!
  9. 9. SOCIAL BENEFITS It isn’t just the economy that benefits. There are well-documented social benefits homeownership has on our communities. Here are a few: • Lower teen pregnancy rates of homeowner’s daughters • Lower crime • Greater educational success of children of homeowners
  10. 10. TYPES OF MORTGAGES • Fixed Rate (or Term) • Adjustable Rate Mortgages (ARMs) • Less Common Types: • Jumbo • Balloon • Interest-Only
  11. 11. FIXED RATE MORTGAGES • Advantages -Save money on interest payments by selecting shorter terms, i.e. a 15 year rather than a 30 year term -longer terms mean smaller monthly payments which means more cash flow for client -amortized for a specific term – fixed payments for the life of the loan A loan that features fixed payments for the life of the loan. Typical terms are 10, 15 and 30 years.
  12. 12. FIXED RATE MORTGAGES, CONT. • Disadvantages -Typically the interest rate is higher than the initial rate of an adjustable rate mortgages -The longer the term the greater the total cost of the loan
  13. 13. ADJUSTABLE RATE MORTGAGES (ARM) • Home loan with an initial fixed interest rate which changes after the specified period of time. • The initial fixed rate period is often 5, 7 and 10 years. • The interest rate could go up or down depending on market conditions.
  14. 14. ADJUSTABLE RATE MORTGAGES (ARM), CONT. Advantages • Lower interest rates than fixed mortgages initially • Lower monthly payment during the fixed rate period
  15. 15. ADJUSTABLE RATE MORTGAGES (ARM), CONT. Disadvantages • When interest rates increase payments increase as well • Lack of reliable payment amounts
  16. 16. LESS COMMON MORTGAGE TYPES Jumbo • Home loan for an amount that exceeds conforming loan limits established by regulation. The loan limit could be $417,000 - $625,000 depending on the area in the U.S. • Financed with the same loan programs as non-jumbo loans, i.e. fixed rate and ARM
  17. 17. LESS COMMON MORTGAGE TYPES, CONT. Balloon • Home loan where the payments are fixed over a period between 1-7 years, at the end of which the balance of the loan is due. • Great option for investors, people who expect a large sum of money (inheritance), and people who plan to move within the fixed payment period.
  18. 18. LESS COMMON MORTGAGE TYPES, CONT. Interest Only • Home loan where only interest payment are made during a fixed period of time, usually between 5-7 years. • At the end of the initial period, the balance is paid off or refinanced • Great option for investors
  19. 19. Bob comes to your teller window upset that his mortgage payment went up…again! You tell him that you’d be happy to assist him with this issue and look up his account information. Viewing his profile you see that he has an Adjustable Rate Mortgage and that he is out of his fixed rate period. Your explanation should include the following: When the interest rate on an ARM increase, the payment ____________. A. goes up B. goes down Try Again. Correct! C. stays the same Try Again. Knowledge Check
  20. 20. What would you suggest Bob do in order to avoid having his mortgage payments increase in the future? A. Refinance into a fixed rate mortgage B. Pay off the loan Try Again. You got it! The only real way to ensure interest rates stay the same over the life of the loan is to take a fixed rate mortgage. C. Make extra payment to decrease his principle Try Again. Knowledge Check
  21. 21. PAYMENTS In order to get an understanding of how mortgage payments are calculated, let’s watch a short video.
  22. 22. MORTGAGE PAYMENTS - PRINCIPLE • To recap the video, the principle is the amount of money borrowed to purchase or refinance a home. Example: Meet Megan. Megan is looking for her first home and has a budget of $100,000.
  23. 23. MORTGAGE PAYMENTS - INTEREST • The money paid to the lender by the borrower expressed as a percentage of the balance. Example: Megan shops around and finds a low interest rate of 3.25%
  24. 24. MORTGAGE PAYMENTS - TERM • No matter what type of mortgage (fixed rate, ARM, etc.) there is always a term component to a mortgage contract that affects payments. • The term refers to how long the payments are spread out over a period of time. Example: Megan chooses a 15 year fixed rate mortgage. That means, her payments will be spread out over 15 years. This leads to the next topic…
  25. 25. …AMORTIZATION Definition – gradual repayment of a loan in equal (or nearly equal) installments which include portions of interest and principle amounts. -businessdictionary.com So, amortization is how payments are calculated over the life of the mortgage loan.
  26. 26. AMORTIZATION EXPLAINED • This topic can be very difficult to understand. But you don’t have to be a math whiz to understand the concept. • Let’s explore Megan’s situation further…
  27. 27. MEGAN’S MORTGAGE • Purchase Price of home = $100,000 • Interest rate = 3.25% • Term = 15 years
  28. 28. AMORTIZATION FORMULA There’s a better way… A = payment amount per period P = initial Principle (loan amount) r = interest rate period n = total number of payments or periods
  29. 29. MICROSOFT EXCEL COMES PRELOADED WITH EASY-TO-USE TEMPLATES THAT DO THE AMORTIZING FOR US. YAY!! PAYMENT, Whew! Plug in the loan parameters here
  30. 30. AMORTIZATION – SUMMARY & KEY POINTS • In our example, Megan’s mortgage payment would be $702.67 given the following: Principle = $100,000 Interest Rate = 3.25% Term = 15 years • Megan will pay more in interest payments in the beginning of the term • Megan will pay more principle at the end of the term
  31. 31. CLOSING COSTS When making the decision to buy or refinance a home, clients should consider other costs associated with mortgage loans. Costs associated with applying, commonly known as “closing costs”. Let’s view another short video which does a great job of explaining closing costs.
  32. 32. This course covered basics about the following: • How mortgage is defined • The different types of mortgages including the advantages/disadvantages of each • Payments and how they’re calculated, referred to in the field as amortization • Closing costs Let’s check your knowledge about these mortgage basics… CONCLUSION
  33. 33. What type of mortgage loan features fixed payments for the life of the loan? A. Adjustable Rate Mortgages B. Fixed Rate Mortgages Try Again. Correct! Knowledge Check
  34. 34. Which of these is NOT a social benefit of homeownership mentioned in this course? A. Lower teen pregnancy rates of homeowner’s daughters B. Lower crime Try Again. Correct! C. Greater educational success of children of homeowners D. Higher property values Try Again. Try Again. Knowledge Check
  35. 35. _____________________ is defined as the gradual repayment of a loan in equal (or nearly equal) installments which include portions of principle and interest amounts. A. Equal Payment Plans B. Amortization Try Again. Correct! C. Revolving Try Again. Knowledge Check
  36. 36. What does the term “principle” refer to when describing mortgage payments? A. The total cost of the loan B. The initial amount borrowed at the beginning and the remaining balance during the life of the loan. Try Again. Correct! C. Neither A or B Try Again. Knowledge Check
  37. 37. Interest is the money paid to the lender by the borrower and is expressed as a __________ of the balance. A. percentage B. ratio Try Again. Correct! C. fraction Try Again. Knowledge Check
  38. 38. Less common mortgages like balloon and interest-only are great options for ___________________________. A. Investors B. People looking for their forever home Try Again. Correct! C. People who move often and likely won’t stay in their home beyond the fixed payment periodD. A and C Try Again. Try Again. Knowledge Check
  39. 39. True or False: The interest rate on an ARM can only go up after the initial fixed rate period. A. True B. False Try Again. Correct! Knowledge Check
  40. 40. True or False: Term refers to the length of time a borrower takes to pay back the amount borrowed. A. True B. False Try Again. Right on! Knowledge Check
  41. 41. True or False: In order to discuss how mortgage payments are calculated with clients you MUST be able to calculate them using the formula. A. True B. False Try Again. Correct! You can find easy-to- use templates in Microsoft Excel. Knowledge Check
  42. 42. True or False: If a person opts for a 15 year fixed rate mortgage they will pay less in interest payments over the life of the loan. A. True B. False You’ll get it next time. Nice job! Knowledge Check
  43. 43. Congratulations! You have completed this course. Please select forward for a list of references so you may continue learning about mortgages on your own. Also, please contact the training department to inform someone that you’ve completed the course. They will email you an evaluation form.
  44. 44. Search the following websites for topics covered in this course or let your curiosity take you in another direction: www.bankrate.com www.mortgagecalculator.org www.youtube.com www.quickenloans.com Further study:

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