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PPT : What is a Traditional Mortgage?
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* A Mortgage is a method for borrowing money to pay for a specific physical asset, such as a house for consumers or plant and equipment for a firm.
* How does a traditional Mortgage differ from a Bond.
o In a mortgage, the lender loans a specific amount of money to the borrower at some interest rate.
o In a mortgage, the borrower makes a fixed payment each year (monthly for home mortgages), and there is no face value payment (or balloon payment) at the end of the term of the mortgage.
o In a mortgage, the loan is fully repaid (both principal and interest) when the last payment (monthly or annual) is made.
* The mortgage payment is calculated to include both:
o The principal payments which pay back the original amount of the loan.
o The interest payments which are calculated by multiplying the interest rate times the unpaid balance of the loan.
o The unpaid balance of the loan is the amount of the original loan minus all the past principal payments.
What is Collateral for a Mortgage?
* Loan contracts often specify that specific assets owned or purchased by the borrower (debtor) are “collateral” for the loan made by the lender (creditor) to the borrower.
* Collateral makes the loan less risky for the creditor.
o If the debtor defaults on the loan by not making the payments as due, there is a judicial process whereby the creditor can repossess the collateral.
o Creditors with collateral also have priority over other creditors if the corporation declares bankruptcy and liquidates or reorganizes.
* A creditor with collateral is called a “secured creditor”.
o Consumer collateral: land, houses, cars, boats, jewelry, stocks and bonds.
o Corporate collateral: plant and equipment, inventory, accounts receivable
o Corporate bonds with collateral are called “mortgage bonds”.
* A creditor without collateral is called an “unsecured creditor”.
o The largest consumer unsecured loans are balances on credit cards.
o Corporate bonds without collateral are called “debentures bonds”.
Traditional Mortgage Payments
* Principal on a Mortgage is the original amount loaned by the bank.
* Traditional Mortgage has fixed Monthly Payment over a fixed Term of years.
* Each payment includes Interest on the Balance Due of the Principal and an additional amount which reduces the Balance Due on the Principal.
* The Monthly Payment is calculated to pay Principal and Interest on the Balance Due by the end of the Term.
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Category : AutomotiveSource : econweb.rutgers.edu
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