Loan Terms & Payment Plans

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1. Describe a grad- uated payment

mortgage.

2. How many GPM plans does FHA offer and how

are they structured?
3. List three ARM indexes. (See

Screen 4 for other correct answers.)

4. What is an in- terest rate cap

and how many are there?

5. Describe a two-step mort-

gage.

6. List two advan- tages of grow-

ing equity mort- gages.

7. Define a reverse mortgage and list three types.

With a graduated payment mortgage (GPM), the

monthly payment for principal and interest gradually
increases by a certain percentage each year for a
certain number of years and then it levels off for the
remaining term of the mortgage.
FHA has five plans available. Three of the five plans
permit mortgage payments to increase at a rate of
2.5, 5, or 7.5 percent during the first 5 years of the
loan. The other two plans permit payments to
increase 2 and 3 percent annually over 10 years.
Starting at the sixth year of the 5-year plans and the
eleventh year of the 10-year plans, payments will
stay the same for the remaining term of the
mortgage.

Certificate of Deposit Index (CODI) Treasury Bill (T-

Bill)
London Inter Bank Offering Rates (LIBOR)

Interest rate caps limit the amount of interest the

borrower can be charged. There are two types of
caps: periodic, which limit the amount the rate can
change at any one time, and overall, which limit the
amount the interest can increase over the life of the
loan.

The two-step mortgage is an ARM loan program in

which the interest rate is adjusted only one time -
usually five or seven years after the loan is
originated.

The low up-front payments may make it easier for

first-time home buyers to qualify for and afford a
loan. A GEM is usually paid off faster than a
traditional fixed-rate mortgage.
With a reverse annuity mortgage, the lender is
making payments to the borrower. There are three
basic types of reverse mortgage:
Single-purpose reverse mortgages - These are
offered by

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Ch. 6 - Loan Terms & Payment Plans

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8. What is a biweek- ly loan and what's the

advantage?
9. Define an open-end loan

and name one common type of open-end loan.

10. What two clauses are important to have in a

blanket loan?
11. What type of loan is very popu-

lar in the sale of new subdivi- sion homes and

furnished con- dominiums and why?
 12. Describe a wrap- around loan.

some state and local government agencies and

nonprofit organizations.
Federally-insured reverse mortgages - These are
known as Home Equity Conversion Mortgages
(HECMs) and are backed by the U. S. Department of
Housing and Urban Development (HUD).

Proprietary reverse mortgages - These are private

loans that are backed by the companies that develop
them.

With a biweekly loan, the borrower pays half of the

month- ly mortgage payment every 2 weeks, rather
than the full payment once a month. This is
comparable to 13 monthly payments a year, which
can result in faster payoff and lower overall interest
costs.

An open-end loan is an expandable loan in which the

lender gives the borrower a limit up to which he or
she may borrow. Each advance the borrower takes is
secured by the same mortgage. A construction loan
is a common type of open-end loan.

Release clause and recognition clause

A package loan finances the purchase of a home

along with the purchase of personal items. It is
popular with both lenders and borrowers because
they believe there is less risk of default. Borrowers
can pay for the essential personal items over the
extended period of the loan, rather than have to
exhaust their reserves to purchase the items
outright.

A wraparound loan allows a borrower who has an

existing loan to get another loan from a second
lender without paying off the first loan.

13.
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Ch. 6 - Loan Terms & Payment Plans

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Over the past

few years, alterna- tives to this stan- dard fixed-rate
loan have be- come increasing- ly more popu-
lar. Having more creative choic-
es available for borrowers allows lenders to make
more loans to more buyers and at higher loan
amounts.
With a graduated payment mortgage (GPM), the
monthly payment for principal and interest gradually
increases by a certain percentage each year for a
certain number of years and then it levels off for the
remaining term of the mortgage. The FHA-245
program is a popular graduated payment mortgage
program.

With an adjustable-rate mortgage (ARM), the interest

rate is linked to an economic index. The loan starts
at one rate of interest, but then it fluctuates up or
down over the life of the loan as the index changes.
The loan agreement describes how the interest rate
will change and when. The interest rate the borrower
pays is usually the index rate plus a margin. An
adjustment period establishes how often the lender
can change the rate - monthly, quarterly or annually.
Interest rate caps limit the amount of interest the
borrower can be charged. A payment cap limits how
much the monthly payment can increase.

Sometimes lenders offer conversion options. This

would allow the borrower to convert the ARM to a
fixed-rate loan at certain times during the life of the
loan.

The two-step mortgage is an ARM loan program in

which the interest rate is adjusted only one time -
usually five or seven years after the loan is
originated.
A growing equity mortgage (GEM) is a fixed-rate
mort- gage whose payments increase by a fixed
amount over a given schedule for an established
period of time, often the entire term of the loan.

With a reverse annuity mortgage, the lender is

making payments to the borrower. The RAM allows
older property owners to receive regular monthly
payments from the equity in their paid-off property
without having to sell. There are three basic types of
reverse mortgage.

Single-purpose reverse mortgages

14. As financial com- munities try to

make funds avail- able to those who need real es-

tate loans, new and different vari- ations of pay-
ment plans be- come available. Here is a recap of
some of the most common plans.
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Ch. 6 - Loan Terms & Payment Plans

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15. A shared appre- ciation mortgage (SAM) is a
mort- gage in which the lender agrees to an interest
rate lower than the prevailing market rate, in
exchange for a share of the appreciated value of the
collateral property.

Federally-insured reverse mortgages Proprietary

reverse mortgages

A pledged account mortgage (PAM) is a type of

graduated payment mortgage under which the
owner/borrower con- tributes a sum of money into an
account that is pledged to the lender.

In a buydown, the lump sum payment that is made to

the lender at closing usually comes from a builder as
an incentive to the buyer or from a family member
trying to help out.

A renegotiable rate mortgage (RRM) is another type

of variable rate mortgage. This mortgage is
amortized over 30 years but must be renewed at
three-, four-, or five-year intervals.

With a bi-weekly payment mortgage, the borrower

pays half of the monthly mortgage payment every
two weeks, rather than the full payment once a
month.

The main benefit of a zero percent-down mortgage is

that it can enable a person to purchase a home now
instead of having to wait to save for a down
payment, which could take years.

Lenders can use a note and mortgage, a deed of

trust or a land contract document in creative ways
to meet the needs of individual borrowers. Let's
recap some of the different options that exist.

An open-end loan is an expandable loan in which the

lender gives the borrower a limit up to which he or
she may borrow. Each advance the borrower takes is
secured by the same mortgage. This loan is also
known as a mortgage or deed of trust for future
advances.

A construction loan is a type of open-end mortgage,

also

16. Lenders can use a note and mort- gage, a deed

of trust or a

land contract doc- ument in creative ways to meet

the needs of indi- vidual borrowers. Let's recap some
of the different op- tions that exist.
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Ch. 6 - Loan Terms & Payment Plans

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17. Since the depre- ciation on mo-

bile homes in the first few years

is pretty steep, many lenders pre- fer to give mobile
home loans with a 15-year term in- stead of the typi-
cal 30-year term.

A purchase mon- ey loan is most commonly a tech-

nique in which the buyer borrows from the seller in
addition to the lender.

A hard money loan is any mort- gage loan that is

given to a borrow-

known as interim financing. A construction loan

finances the cost of labor and materials as they are
needed and used throughout a building project.

A blanket loan covers more than one parcel of real

estate, owned by the same buyer, as collateral for
the same mortgage.

A package loan is one that finances the purchase of

a home along with the purchase of personal items,
such as a washer, a dryer, a refrigerator, an air
conditioner, carpeting, draperies and furniture or
other appliances.
A bridge loan is a short-term loan that covers the
period between the end of one loan and the
beginning of anoth- er.

A wraparound loan allows a borrower who has an

existing loan to get another loan from a second
lender without paying off the first loan.

A participation loan involves the lender sharing an

inter- est in the property.

With long leases in place, lenders are willing to allow

ten- ants to pledge their interests as collateral for
improvement loans. This is referred to as a leasehold
loan.

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Ch. 6 - Loan Terms & Payment Plans

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er in exchange for cash.

18. Which statement is true about

 a growing equity mortgage?

19. The interest rate is adjusted only one time

on which type of mortgage plan?
20. Which loan cov- ers the period of time
between the end of one mort- gage and the be-
ginning of anoth- er?
21. Single-purpose and proprietary are two types
of what kind of mortgage?
22. Which of these loans is a type of open-end
loan?
23. What is the type of loan where the lender
shares in- terest in the prop- erty?
24. A blanket mort- gage does which?

It allows quick repayment of the loan through

accelerated payments.

Two-step

Bridge

Reverse

Construction

Participation

Covers more than one piece of property.

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Ch. 6 - Loan Terms & Payment Plans

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25. Which of the fol- lowing is not true about

reverse an- nuity mortgages?
26. What is the in- terest rate on an ARM tied to?
27. Which of the fol- lowing is a popu- lar
graduated pay- ment mortgage program?

The loan must be repaid before the borrower's death.

Index

FHA-245