Term
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Definition
| the actual cost of borrowed funds expressed as an interest rate |
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Term
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Definition
| does NOT equal the actual EAR; the actual coat to a borrower or yield to a lender |
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Term
| interest- how does it affect borrower and lender |
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Definition
| it is an investment yield for the lender, yet a cost for the borrower |
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Term
| what happens to the Effective annual rate EAR when the compounding period is less than annually |
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Definition
| The actual cost of credit EAR or APR |
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Term
| what are consumer loans? How often are they compounded? |
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Definition
| Consumer loans are credit cards and installment debt and they are compounded daily |
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Term
| if the stated interest for a credit card is 18% what is the APR. hint use EAR formula |
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Definition
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Term
| Federal Consumer Laws have been enacted to require that lenders do what? |
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Definition
| disclose the actual APR to borrowers |
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Term
| TVM Time Value of Money problems require what? |
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Definition
| that n and i be consistent |
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Term
| if we are using monthly compounding, what must n and i be converted to? |
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Definition
n must be converted from years into months (n x 12)
i must be converted into months (i(annual)/m) |
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Term
| generally speaking what does n X m = |
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Definition
| the number of compounding periods |
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Term
| generally what does i(annual)/m = |
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Definition
| The appropriate interest rate |
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Term
| PVA Present value of an Annuity + |
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Definition
| the sum of the present values PVs of the individual payments |
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Term
| n is multiply i is divide |
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Definition
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Term
| what is the present value of a 10 year monthly annuity of $500 if the discount rate is 8% |
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Definition
500 +/- PMT
10 x 12 N
8 / 12 i
PV
41,210.74 |
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Term
| what is the state of the interest rate in a fixed rate mortgage |
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Definition
| fixed for the length of the loan |
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Term
| what type of loan is a FRM |
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Definition
| an amortizing loan -meaning each pmt pays off the principal (original loan amount) by some amount |
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Term
| what is another name for the FRM |
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Definition
| CPM constant payment mortgage |
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Term
| in a FRM each pmt has an interest an principal component that is.... |
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Definition
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Term
| what happens to the interest component that is large in the early months of the FRM loan |
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Definition
| gradually declines over time |
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Term
| what happens to the pricipal component of an FRM that is small in the early months |
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Definition
| gradually increases over time |
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Term
| how is the FRM similar to an annuity from the standpoint of the lender |
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Definition
| the PVA is equal to the loan amount |
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Term
| how do you calculate the pmt of a FRM |
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Definition
PV of the loan
_ x 12n
_ /12i
pmt |
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Term
| what are the remaining payments of a FRM discounted at the contract interest rate |
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Definition
| the remaining mortgage balance |
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Term
| what are the two steps to calculating the remaining balance on a loan |
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Definition
1. calculate pmt on the loan
2. calculate the PVA on the remaining pmts
take the pmt from step one, interest rate from step 1
adjust the period subtracting the number of years the payments have been maed from the 30.
solve for pv |
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Term
| what would the period of a 30 yr FRM be after 5 years |
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Definition
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Term
| how do you calculate the cumulative interest paid over 5 years (60 months) |
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Definition
| solve for pmt and multiply it by the numer of months the payments have been made (60) |
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Term
| how is an frm loan different than an interest only loan |
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Definition
interest only loans do not ammortize.
there is not principle component
the total payment is lower
real estate is more affordable |
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Term
| why are interest only loans more risky to lenders |
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Definition
| borrowers build up no equity, lowers the costs of defaults for borrowers making defaults more like to happen |
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Term
| what is a balloon payment |
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Definition
| at the end of the loan term the entire principal is due its the large final payment |
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Term
| what are the four principals of the budget mortgage payment |
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Definition
1.principal component (amortizing loans)
2. interest
3. escrow deposits for property tax
4. hazard insurance payments |
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Term
| what is an escrow and y is it important |
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Definition
| a set aside account for a dedicated purpose. helps homeowners to buget for tax and insurance that has to b paid annualy. |
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Term
| what is an escrow and y is it important |
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Definition
| a set aside account for a dedicated purpose. helps homeowners to buget for tax and insurance that has to b paid annualy. |
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Term
| what are prepayment rights |
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Definition
| the right to payoff either partial or full payoff of the mortgage prior to the maturity of the loan. |
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Term
| what is an escrow and y is it important |
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Definition
| a set aside account for a dedicated purpose. helps homeowners to buget for tax and insurance that has to b paid annualy. |
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Term
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Definition
| paying more than the budget payment amount each month to lessen the time it takes to pay off the loan. |
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Term
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Definition
| entire loan principal balance is paid and the contract terminates. |
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Term
| what are the two ways full payoffs occur |
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Definition
| owner sells home or refinances existing mortgage |
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Term
| what are the two ways full payoffs occur |
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Definition
| owner sells home or refinances existing mortgage |
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Term
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Definition
| ratio of mortgage loan amount to property value |
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Term
| what is the min use of LTV |
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Definition
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Term
| wat is the maximum allowed LTV |
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Definition
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Term
| what are thetwo components of loan pricing |
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Definition
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Term
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Definition
| fee of 1% of the loan amount. must be paid when loan is made. highest up front cost |
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Term
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Definition
| origination fee and loan discount fees |
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Term
| what does the origination fee cover |
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Definition
| usually 1% covers overhead costs and profit of the lender |
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