Home mortgage 101
10-22-2005, 01:59 PM
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Home mortgage 101
Fellas, Ive been meaning to put together a quick referance guide to clear up some of the poor advice and enhance the good advice around here. Well, I never did get around to that 
BUT I did find this test I had a friend create for me when I first started in the industry. As a vetren, he just wrote up several questions he deemed important for me to know in my rookie year. I sat down with stack of books and answered as best I could.
Please forgive me if there is an answer or two that is not 100% correct. It should be 100% but then again, i wrote this as a rookie and only grazed through it just now for mistakes. I didnt see any so enjoy.
Hopefully this will provide a basis to solicite advice and generate better questions among each other
Genral Info
1: When the Feds raise rates, what exactly are they raising, and what is it currently? (i.e. do they just call all the banks and tell them what the rate is?) Hint: starts with a letter, and ends with something you hate to get in the mail.
When the Feds raise rates, they are raising the index. An index is defined as a measure of general interest rate trends that a lender uses to determine changes in a mortgage’s interest rate.
In practice, an index theoretically indicates how much it costs a bank to take in money. For example, if the going rate on a 6 month CD is 1.75%, it is costing the bank 1.75% to lend to a mortgage borrower.
The most commonly used indexes however are for 6 and 12 month Treasury Bills. The current T-bill index is published every morning in the Wall Street Journal or the business section of most newspapers.
Prime rate, the most commonly referred to rate by borrowers, relies on the 3 month treasury-bill. The Prime Rate is the interest rate charged by banks for short-term loans to their most creditworthy customers whose credit standing is so high that little risk to the lender is involved. Home Equity Lines of Credit are most commonly attached to prime.
2:Tell me what indexes loans based off of? Clarify: there are a few. Hint: 1 of them is the LIBOR Index.
A: what are the general characteristics of each index? Stability, unstable? One sentence each please.
• T. Bills: The most commonly used government rate indexes for ARMS.
o They tend to be the fastest moving. ie: they respond quickly to market changes
• Certificates of Deposits: ARMS are sometimes tied to the average rate banks are paying on 6 months CD’s
o As with T. Bills, CD’s tend to move rapidly with overall changes in interest rates. However, CD rates tend to move up a bit more slowely when rates rise, because profit minded bankers take their sweet time when it comes to paying more interest to depositors.
• COFI: 11th district cost of funds. Tracks the weighted average cost of savings, borrowings, and advances for the Federal Home Loan Bank board member banks of the 11th district (SW US states).
o This index tends to be relatively stable and slower moving. This provides the advantage of slow rate response when rates are on the upswing. On the other hand, when rates decrease, the borrower will have to be patient to benefit from falling interest rates when rates are on the decline.
• LIBOR: the average interest rate that major international banks charge each other to borrow US dollars in the London money market
o The LIBOR tends to adjust quite rapidly to changes in interest rates.
• MTA:“The Monthly Treasury Average is a relatively new ARM index. This index is the 12 month average of the monthly average yields of U.S. Treasury securities adjusted to a constant maturity of one year. It is calculated by averaging the previous 12 monthly values of the 1-Year CMT. Because this index is an annual average, it is more steady than the 1-Year CMT index. The MTA index generally fluctuates slightly more than the 11th District COFI, although its movements track each other very closely”}
3:What is a bank margin? Give me what a typical bank's margin is on a 30 yr fixed loan.
A banks margin (or spread) is the markup (or profit) on the money they lend. It varies, but a borrow can expect to pay a 3-4% margin on a 30 year fixed loan.
B: what relationship does a bank's margin have with the indexes mentioned above?
Since the margin is added to the banks index, the relationship is reliant upon which product the borrower secures. Fixed typically have a much higher margin than an adjustable rate mortgage.
4: How are retail interest rates determined ? Utilize all answers given from above. hint: a+b=c
Retail rates are determined by: index + margin = interest rate
5: What is prime? How can a person find out what prime is or where would you most likely direct a client to watch the prime rate? What important lending product is based on "prime's rate"?
Prime is a compiled number from money center banks and represents the rate at which they lend to their best consumers. Prime is not a very volatile index however it does rise quickly. On the other hand, it will generally decline slowly. Prime rate is published in the Wall Street Journal. Most home equity lines of credit and second mortgages are in someway tied to the prime interest rate.
Products: Most Commonly used:
Give me 4 major characteristics of a HELOC. What are it's benefits, draw backs? What does HELOC stand for?
1. A HELOC’s interest is tax deductable as long as two IRS requirements are met ($100,000 test and Market Value test)
2. You only pay interest on the outstanding loan balance, not the total line of credit.
3. You will get the best interest rate on a HELOC if the total amount of the first mortgage plus the HOLEC does not exceed 80% of your home’s fair market value.
4. Customizable – fixed rate, arm and more.
Benefits: As long as you don’t exceed the original amount agreed upon by you and the lender, you can take as much as you need, whenever you need it. HELOCS are great for debt consolidation because they typically have much lower interest rates than standard credit cards
Drawback: You can lose your house if you don’t repay a HELOC. Since they are secured by equity in your home, lenders can foreclose if the borrowers default.
HELOC stands for: Home equity line of credit.
What is a 5/1 arm? 3/1 arm, 7/1? How long are they fixed for and what are their amoritization periods?
3/1, 5/1, or 7/1 ARMs, fixed rate for the first respective number of years, then adjusts annually thereafter the amount of times referred to in the second number. These loans are fully amortized at 30 years.
What does amortization mean?
Amortization is the process of liquidating debt though periodic installment payments throughout the loans term. Loans are amortized with monthly payments consisting of primarily interest in the early years of the loan. As the amortization process continues, interest is slowly replaced with principal on repayment of the debt. A fully amortized loan means it will be repaid in full by the last payment of the loan term.
What do you see as a typical rate adjustment? After how long? HOw high/per year? How often? What is the typical cieling you see?
For ARMS that adjust at 6 month intervals, the adjustment cap is generally plus or minus 1%. For ARMS that adjust more than once annually, the adjustment cap is typically plus or minus 2%.
ARMS typically have lifetime caps of 5 to 6% higher or lower than the initial start rate.
What is a 30 year fixed? 15 year fixed? What are they amoritized to, how long?
15 and 30 year fixed rate mortgages are amortized to their respective number of years at a rate fixed from the initial agreement.
What is a second mortgage?
A second mortgage is a second loan secured by the same piece of property. ex: HELOC
What do you suppose a 30/15 is? take a guess from what you learned above. 30/30?
In a 30/15 the rate is fixed for a 15 years and the payment is amortized over 30 years to provide for a lower monthly payment. This loan is due and payable as a balloon loan at the end of 15 years.
In a 30/30, the rate is fixed and amortized over 30 years.<-- great! This was a hard question for someone with no experience! RC.
What is a prepayment penalty? From your common sense, what do you suppose a "soft prepay" means? Then "hard prepay?"
• The "Hard" penalty means the mortgaged property can NOT be sold or refinanced during the set no-prepayment timeframe; without the borrower becoming liable for a penalty.
• The "Soft" prepayment penalty means the mortgaged property can NOT be refinanced during the set no-prepayment timeframe. But, it can be sold at any time without becoming liable for a penalty.
What are the three credit beuros?
Equifax, transunion, experian
What defines a conforming loan?
A conforming loan conforms to the requirements of Fannie Mae and Freddie Mac. Usually, the specific reference is to loan amount. The maximum loan amount for 1997 as specified by Congress for single family loan purchased by either of these two agencies is $227,150. The term also refers to a loan which conforms to all of the other borrower and property requirements of these two agencies
Non comforming?
A non-conforming loan is generally meant to be those loan amounts above $227,150. The term can also refer to those loan programs which allow for different borrower and property characteristics than usually required by Fannie Mae and Freddie Mac.
government loan?
A mortgage that is insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA) or the Rural Housing Service (RHS). Mortgages that are not government loans are classified as conventional loans.
Conventional LOan?
Refers to home loans other than government loans (VA and FHA).
Non-conventional?
They are government loans.
Can you have both a non-conventional non-conforming loan?
No
What is Fannie Mae? What is Freddie Mac?
Fannie Mae = Federal national mortgage association
providing financial products and services that make it possible for low-, moderate-, and middle-income families to buy homes of their own.
FNMA is a government-backed agency that works with lenders to ensure mortgage funds are available to homebuyers.
Freddie Mac = Federal home loan mortgage corporation
Freddie Mac is a stockholder-owned corporation chartered by Congress [PDF 82K] in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing. Freddie Mac purchases single-family and multifamily residential mortgages and mortgage-related securities, which it finances primarily by issuing mortgage pass through securities and debt instruments in the capital markets.
BUT I did find this test I had a friend create for me when I first started in the industry. As a vetren, he just wrote up several questions he deemed important for me to know in my rookie year. I sat down with stack of books and answered as best I could.Please forgive me if there is an answer or two that is not 100% correct. It should be 100% but then again, i wrote this as a rookie and only grazed through it just now for mistakes. I didnt see any so enjoy.
Hopefully this will provide a basis to solicite advice and generate better questions among each other
Genral Info
1: When the Feds raise rates, what exactly are they raising, and what is it currently? (i.e. do they just call all the banks and tell them what the rate is?) Hint: starts with a letter, and ends with something you hate to get in the mail.
When the Feds raise rates, they are raising the index. An index is defined as a measure of general interest rate trends that a lender uses to determine changes in a mortgage’s interest rate.
In practice, an index theoretically indicates how much it costs a bank to take in money. For example, if the going rate on a 6 month CD is 1.75%, it is costing the bank 1.75% to lend to a mortgage borrower.
The most commonly used indexes however are for 6 and 12 month Treasury Bills. The current T-bill index is published every morning in the Wall Street Journal or the business section of most newspapers.
Prime rate, the most commonly referred to rate by borrowers, relies on the 3 month treasury-bill. The Prime Rate is the interest rate charged by banks for short-term loans to their most creditworthy customers whose credit standing is so high that little risk to the lender is involved. Home Equity Lines of Credit are most commonly attached to prime.
2:Tell me what indexes loans based off of? Clarify: there are a few. Hint: 1 of them is the LIBOR Index.
A: what are the general characteristics of each index? Stability, unstable? One sentence each please.
• T. Bills: The most commonly used government rate indexes for ARMS.
o They tend to be the fastest moving. ie: they respond quickly to market changes
• Certificates of Deposits: ARMS are sometimes tied to the average rate banks are paying on 6 months CD’s
o As with T. Bills, CD’s tend to move rapidly with overall changes in interest rates. However, CD rates tend to move up a bit more slowely when rates rise, because profit minded bankers take their sweet time when it comes to paying more interest to depositors.
• COFI: 11th district cost of funds. Tracks the weighted average cost of savings, borrowings, and advances for the Federal Home Loan Bank board member banks of the 11th district (SW US states).
o This index tends to be relatively stable and slower moving. This provides the advantage of slow rate response when rates are on the upswing. On the other hand, when rates decrease, the borrower will have to be patient to benefit from falling interest rates when rates are on the decline.
• LIBOR: the average interest rate that major international banks charge each other to borrow US dollars in the London money market
o The LIBOR tends to adjust quite rapidly to changes in interest rates.
• MTA:“The Monthly Treasury Average is a relatively new ARM index. This index is the 12 month average of the monthly average yields of U.S. Treasury securities adjusted to a constant maturity of one year. It is calculated by averaging the previous 12 monthly values of the 1-Year CMT. Because this index is an annual average, it is more steady than the 1-Year CMT index. The MTA index generally fluctuates slightly more than the 11th District COFI, although its movements track each other very closely”}
3:What is a bank margin? Give me what a typical bank's margin is on a 30 yr fixed loan.
A banks margin (or spread) is the markup (or profit) on the money they lend. It varies, but a borrow can expect to pay a 3-4% margin on a 30 year fixed loan.
B: what relationship does a bank's margin have with the indexes mentioned above?
Since the margin is added to the banks index, the relationship is reliant upon which product the borrower secures. Fixed typically have a much higher margin than an adjustable rate mortgage.
4: How are retail interest rates determined ? Utilize all answers given from above. hint: a+b=c
Retail rates are determined by: index + margin = interest rate
5: What is prime? How can a person find out what prime is or where would you most likely direct a client to watch the prime rate? What important lending product is based on "prime's rate"?
Prime is a compiled number from money center banks and represents the rate at which they lend to their best consumers. Prime is not a very volatile index however it does rise quickly. On the other hand, it will generally decline slowly. Prime rate is published in the Wall Street Journal. Most home equity lines of credit and second mortgages are in someway tied to the prime interest rate.
Products: Most Commonly used:
Give me 4 major characteristics of a HELOC. What are it's benefits, draw backs? What does HELOC stand for?
1. A HELOC’s interest is tax deductable as long as two IRS requirements are met ($100,000 test and Market Value test)
2. You only pay interest on the outstanding loan balance, not the total line of credit.
3. You will get the best interest rate on a HELOC if the total amount of the first mortgage plus the HOLEC does not exceed 80% of your home’s fair market value.
4. Customizable – fixed rate, arm and more.
Benefits: As long as you don’t exceed the original amount agreed upon by you and the lender, you can take as much as you need, whenever you need it. HELOCS are great for debt consolidation because they typically have much lower interest rates than standard credit cards
Drawback: You can lose your house if you don’t repay a HELOC. Since they are secured by equity in your home, lenders can foreclose if the borrowers default.
HELOC stands for: Home equity line of credit.
What is a 5/1 arm? 3/1 arm, 7/1? How long are they fixed for and what are their amoritization periods?
3/1, 5/1, or 7/1 ARMs, fixed rate for the first respective number of years, then adjusts annually thereafter the amount of times referred to in the second number. These loans are fully amortized at 30 years.
What does amortization mean?
Amortization is the process of liquidating debt though periodic installment payments throughout the loans term. Loans are amortized with monthly payments consisting of primarily interest in the early years of the loan. As the amortization process continues, interest is slowly replaced with principal on repayment of the debt. A fully amortized loan means it will be repaid in full by the last payment of the loan term.
What do you see as a typical rate adjustment? After how long? HOw high/per year? How often? What is the typical cieling you see?
For ARMS that adjust at 6 month intervals, the adjustment cap is generally plus or minus 1%. For ARMS that adjust more than once annually, the adjustment cap is typically plus or minus 2%.
ARMS typically have lifetime caps of 5 to 6% higher or lower than the initial start rate.
What is a 30 year fixed? 15 year fixed? What are they amoritized to, how long?
15 and 30 year fixed rate mortgages are amortized to their respective number of years at a rate fixed from the initial agreement.
What is a second mortgage?
A second mortgage is a second loan secured by the same piece of property. ex: HELOC
What do you suppose a 30/15 is? take a guess from what you learned above. 30/30?
In a 30/15 the rate is fixed for a 15 years and the payment is amortized over 30 years to provide for a lower monthly payment. This loan is due and payable as a balloon loan at the end of 15 years.
In a 30/30, the rate is fixed and amortized over 30 years.<-- great! This was a hard question for someone with no experience! RC.
What is a prepayment penalty? From your common sense, what do you suppose a "soft prepay" means? Then "hard prepay?"
• The "Hard" penalty means the mortgaged property can NOT be sold or refinanced during the set no-prepayment timeframe; without the borrower becoming liable for a penalty.
• The "Soft" prepayment penalty means the mortgaged property can NOT be refinanced during the set no-prepayment timeframe. But, it can be sold at any time without becoming liable for a penalty.
What are the three credit beuros?
Equifax, transunion, experian
What defines a conforming loan?
A conforming loan conforms to the requirements of Fannie Mae and Freddie Mac. Usually, the specific reference is to loan amount. The maximum loan amount for 1997 as specified by Congress for single family loan purchased by either of these two agencies is $227,150. The term also refers to a loan which conforms to all of the other borrower and property requirements of these two agencies
Non comforming?
A non-conforming loan is generally meant to be those loan amounts above $227,150. The term can also refer to those loan programs which allow for different borrower and property characteristics than usually required by Fannie Mae and Freddie Mac.
government loan?
A mortgage that is insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA) or the Rural Housing Service (RHS). Mortgages that are not government loans are classified as conventional loans.
Conventional LOan?
Refers to home loans other than government loans (VA and FHA).
Non-conventional?
They are government loans.
Can you have both a non-conventional non-conforming loan?
No
What is Fannie Mae? What is Freddie Mac?
Fannie Mae = Federal national mortgage association
providing financial products and services that make it possible for low-, moderate-, and middle-income families to buy homes of their own.
FNMA is a government-backed agency that works with lenders to ensure mortgage funds are available to homebuyers.
Freddie Mac = Federal home loan mortgage corporation
Freddie Mac is a stockholder-owned corporation chartered by Congress [PDF 82K] in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing. Freddie Mac purchases single-family and multifamily residential mortgages and mortgage-related securities, which it finances primarily by issuing mortgage pass through securities and debt instruments in the capital markets.
Last edited by GoDucksCLSPride; 10-22-2005 at 02:01 PM.
10-22-2005, 03:15 PM
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I keeps it real
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Join Date: Apr 2004
Location: Tempe, Arizona
Age: 45
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Originally Posted by BigPimp
Cliff notes? 
j/k this is very technical.
j/k this is very technical.
Thats why I decided to post it. Seeing people solicite terrible advice because they fail to understand the technical details is like nails on a chalkboard sometimes. Although others have given some very good advice and I suppose it'd be nice having some technical details around to support them
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