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25 Cards in this Set

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Interest concepts

Interest


Simple interest


Compound interest


Mortgage interest


Simple interest

At the end of a loan, the loan amount plus the accurued interest is paid back in one lump sum to clear the debt

Compound interest

When simple interest accured over the initial term of the loan is added to the principal, after which time interest is charged on the total of both. Aka charging interest on the interest

Mortgage interest

Interest owing = principal x rate of interest x time borrowing



I = P x R x T

When to use simple interest in mortgage deal

Bridge/interim financing deal



Blending mortgage rates or interest amounts for an assumed deal or second mortgage deal

Compound interest formula

A = P (1 + r)^n



A = amount owed after n years, including interest



orrowed


R = annual rate of interest expressed as a decimal


P = principal. Initial amount borrowedR = annual rate of interest expressed as a decimaln = term (years or months) for which the amount is borrowed


Fix rate mortgage compounded ..

Semi annually

Variable rate, interest is compounded ...

Monthly or semi annually

Loan variables

Interest rate


Term


Amortization period


Repayment schedule


Prepayment options


Payout penalties


Down payment

Prepayment options

Lump sum payments


Increased or double up payments


Anniversary payments


Pat downs at renewal

Lump sum payments

Allowed to make payments up to a specific amount one or more times a year ex 15%

Increased or double up payments

Allow borrowers to increase their payments up to 100% (doubling original payment), one or more times a year, up to a max

Anniversary payments

Similar to lump sum, but only on anniversary date of mortgage agreement (once per year)

Pay downs at renewal

Allow borrowers to pay a lump sum directly against principle at the time of term renewal

Payout penalties

Three months interest


Interest rate differential (IRD)

Claw back penalty

Lender gives you a chunk of cash from your mortgage. If the borrower decides to break the term early that cash will have to be repaid

The basic mortgage broker transactions

Purchase


Renew


Switch/transfer


Refinance


Borrow equity


Pay off




Interim financing

Short term loan.


Purpose of bridging the gap between the closing of a sale and the closing of a purchase



To protect against unforeseen events or delays in processing paperwork

Benefits of second mortgage

Sometimes more economical than refinancing in terms of interest cost



The non interest costs to arrange a second mortgage are less than those to arrange a first mortgage



If the buyer wants second mortgage, The seller avoids the cost of discharging the existing mortgage early. Seller might pass the savings to the buyer by reducing the purchase price

Reasons for refinancing

Falling interest rates,


Rising interest rates,


consolidating debt,


borrowing more money by taking out equity,


borrowing more money by topping up the mortgage amount,


borrowing more money by combining and extending the mortgage,


change in borrower situation

What kind of mortgage can't be refinanced

Closed-term mortgage with no payout option

Documentation for refinancing

Payout statement,


current interest rate,


penalty amount for breaking the term of the loan,


property ownership information,


mortgage statement

Two main ways to borrow equity

For a second mortgage,


through a secured line of credit

If a borrower is in the middle of a mortgage term and wants to refinance she can...

Pay out the existing mortgage and arrange a new mortgage,


top up and combine,


combine and extend

Top up and combine deal

Involves borrowing additional funds and adding them to the current mortgage amount



The interest rate for the new money is combined with an interest rate for the old money. Gets an average