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Copyright ©2008 by the McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Professor Thomson
Fin 3433
Chapter 10
Professor Thomson
Fin 3433
Chapter 10
Real Estate
Finance:
The Laws and
Contracts
Real Estate
Finance:
The Laws and
Contracts
10-2
Some Effects of Mortgage Debt
More households can own their home
Businesses can use their cash for core
activities
Investors can leverage and diversify
investments
Homeowners can obtain credit on better
terms than consumer debt (home equity
credit lines)
•Tax favored
•Longer term
•Lower interest rate
10-3
Two Elements of a
Mortgage Loan
Note: Exact terms of the financial
obligation
Mortgage: Pledges the property as
security for the note
10-4
The Note – Interest Rates
Fixed rate
•365-day interest (daily rate is 1/365 of annual
rate; contrasts with commercial mortgage
loans at 360-day interest
•Monthly charge is 1/12 of stated annual rate
Adjustable rate
•Index rate: Market-determined rate beyond
control of either borrower or lender
•U.S. Treasury Constant Maturity Rate
•Thrift institution Cost of Funds Index
•LIBOR
•Home mortgage rate index
10-5
The Note – Interest Rates (continued)
Adjustable rate (continued)
•Margin: Lender’s markup
•200 to 300 basis points (bp)
•Average is extremely stable at 277 - 278 bp
•Change Date: Date that interest rate changes
each time
•New index rate commonly is the last published rate
45 days, for example, before the change date
•Teaser rate: Initial, temporarily reduced interest
rate
10-6
The Note – Interest Rates (continued)
Adjustable rate (continued)
•Interest rate caps: Limit on changes in interest
rate charged
•Periodic
•Lifetime
•Important question: Does cap apply to the teaser
rate?
•Payment caps: Limit on payment changes
rather than interest rate changes
•Can result in negative amortization: Unpaid interest
added to the balance
