Mortgages by method of payment

Mortgages by method of payment

Mortgages by method of payment

  1. Straight (or straight-term mortgage)

A loan in which only interest payments are made periodically with the entire amount due at maturity is called a straight (or straight-term) loin, Mortgages by method of payment.

Although such loans are not used frequently to finance the purchase of single-family houses, they are used quite often in land transactions.

In these situations, developers will be able to pay for the land after development and sale.

In the interim, they pay interest only.

  1. Standard fixed payment mortgage

Mortgages by method of payment

A standard fHed payment mortgage (SFPM) is a fully amortized loan that is completely paid off by equal, periodic payments.

This is the standard type of loan used to finance single-family homes today.

It is also used sometimes for income-producing properties, although partially amortized loans are used often more frequently to finance these properties.

Payments on fully amortized mortgages are usually required monthly. At maturity of the loan, the loan balance is zero.

  1. Partially amortized mortgage

Mortgages by method of payment

If a loan is not completely paid off by equal, periodic payments, but periodic payments are required, it is a partially amortized loan.

In oper words, the loan will be partially paid off by periodic payments.

but there will a remaining balance on the loan which must be paid off at maturity.

This remaining balance on a partially amortized loan is called a balloon and is satisfied by a balloon payment.

Mortgages by payment or yield variability (AMLs, GPMs and SAMs)

In 198 1 the Federal Home Loan Bank Board issued regulations incorporating both variable and renegotiable rate mortgages into adjustable mortgage loan regulations.

“An adjustable mortgage loan (AML) permits adjustment of the interest rate, which may be implemented through changes in the payent amount.

the outstanding principal loan balance, the loan term, or any combination of these variables.”

(FHLBB Res. No. 8-120691981 .)

Mortgages by method of payment

As with VRMs and RRMS, interest rates must be decreased as the index decreases.

And of course may be increased as the index rises.

The lender may increase the loan term

The lender may increase the loan term up to 40 years to cover interest rate increases

(although such an extension is not an option that must be offered to borrowers).

The interest rate may be tied to any index beyond the control of the lender and may be adjusted as often as monthly.

Examples of indexes to which an AML may be tien are the FI-LB District cost of funds to FSLIC-insured savings and loans; (2) the national

average contract mortgage rate

Average contract mortgage rate for the purchase of existing home.

The monthly average of weekly auction rates on three month or six-month

U.S. Treasury bills, and (4) the monthly average yield on U.S.

Treasury securities adjusted to constant maturities of one, two, three or five years. All of these indexes are published in the Federal Reserve Bulletin.

Notice of interest rate changes must be given

Notice of interest rate changes must be given to borrowers at least 30 days.

But no more than 45 days, prior to the change.

Lenders may not charge a prepayment penalty or fee associated with interest rate changes.

Within these regulations and guidelines, lenders may establish their own AML plans.

However, administrative costs, competition and secondary market requirements limit flexibility for most lenders’ in this regard.

Mortgages by method of payment

Frequent adjustments are costly

Frequent adjustments are costly.

Competitors may limit the frequency and magnitude of adjustments.

And secondary market lenders have established certain limitations for the AMLs they will purchase.

For example, the Federal Housing Loan Mortgage Mortgages by method of payment

Corporation will not purchase AMLs that allow rising balances, or that have a subsidized payment (“buy down”) in the early months.