Research Paper on Mortgage Loan Amortization
Introduction
Businesses in the present environment aim at gaining more returns with the least operating cost possible. Most people dream of having homes of their own on one time of their lives. The moat challenging factor is shopping for a home at the most favorable rate. Changes in interest rates play a significant role in monthly payments made on a mortgage. In addition, the length of the loan offered in paying for a home affect the total amount of money repaid. In general, mortgage loan amortization is the process of calculating the monthly loan repayments in relation to the principal and towards the interest. The calculation involves loan amount, interest rate, and repayment start date. In the recent years, housing has been made stable in most areas due to the fact that real estate prices have stabilized. Most house owners experiences favorable loan amortization rates that fit their incomes.
Mortgage loan amortization has benefited many people because it prevents them from being conned by fake house owners and middlemen. The introduction of online amortization calculator enables mortgage owners to determine the correct amount of money to refund each month depending on the agreed interest rate. In addition, the calculator gives the total amount of loan to be repaid at the end of the lease period bearing in mind the nature of interest rate changes due to changing economy. Two separate documents are used while applying for a mortgage loan. These are mortgage note and security interest evidence by the mortgage document. These two documents are given together and when split, either the loan bearer or the mortgage owner has the right to deny any contract made concerning a real estate. The Anglo-American law only accepts a mortgage transaction to have taken place only when the owner has pledged his or her interest as security for a mortgage (Berbanke 15-17).
Mortgage is a name given to a type of loan, also known as real estate loan whereby an individual promises to pay particular sum of money after an agreeable future time. Names of loans keeps changing because of a number of reasons but, all have the same basic characteristics that are the amount, term, payment schedule, and contract interest rate. The mortgage market is a name representing institutions and individuals involved in mortgage finance in different ways. The mortgage market can be broken down into two different entities: the primary mortgage and the secondary mortgage. The primary mortgage refers to the original mortgage market while the secondary mortgage refers to a place where the existing mortgage are purchased and sold. According to the mortgage history, the secondary mortgage has always been small and rarely active. Loan amortization ensures that a mortgage client has clear information on the amount of mortgage expected to pay at the end of the lease period depending on the contract interest rate (Berbanke 22-27).
A lot of risks are involved while taking a mortgage loan and a person needs to be extra careful to avoid conmen, who have flocked the real estate market. In order to limit the amount of risks associated with the mortgage loan repayment, an individual should place restrictions on the mortgage debts purchasable. Various factors play a significant role in assessing risks associated with a certain mortgage loan. These are: the payment-to-income ratio, the loan-to-value ratio, the debt-to-income ratio, and the amount of the loan. The payment-to-income ratio includes the monthly loan payment that involves real estate taxes divided by borrower’s monthly income. The loan-to-value ratio stands for the loan amount divided by the estimated value of the property. The down payment is the difference between the loan amount and the estimated property value. Moreover, the debt-to-income ratio forms the ratio of all monthly expenses occurred on debts to monthly gross income. With the loan amortization calculator, determining these ratios becomes easier and an individual is free from risks associated with mortgage loan repayment (Green and Wachter 93-114).
On the other hand, the traditional mortgage repayment process was different from the present method because different interest rates were offered. In the ancient times, a 25% of a payment-to-income ratio or a 36% of debt-to-income ratio was considered raising a concern. Generally, the higher the mortgage loan ratios the higher the risks an individual exposes himself or herself to. When a loan is made to a borrower with a higher ratio than that stated in the ratios, the risks of loan repayment increases. In general, people should set limits at which to purchase a real estate otherwise, fall in the trap of real estate owners and repay large amount of money. According to the Federal Housing Finance board, the maximum amount of loan charged for a single family home was $417, 0000 in the lower 48 states. If a loan exceeds this amount, then a person should be cautioned not to accept it since it will cost a lot to repay back (Estes et al 23-24).
People who have purchased their homes recently (from the year 2012 up to date) have a fixed mortgage rate of 79% share according to new mortgage rates. In addition, the variable and adjustable rate mortgage offer 10% share, while 11% is a combination mortgage. During the previous years (from 2011 and below), the shares were two-thirds fixed rate mortgages, a quarter adjustable rate and 10% for combination rates. In the present years mortgages that have longer amortization period have gained fame because people are having humble time to pay their loans. Within the year 2012, the mortgages on homes purchased presented a 68% of mortgages with an amortization period of 25 years or less. According to 2012 statistics, about 32% of real estate owners have increased the amortization period. This analysis has gone against the borrower’s expectations with their repayment horizons and original contracts. Moreover, the home owners who had fully repaid their mortgages never benefited from the offer. From the survey, mortgage borrowers increase their normal payments by a combined amount of $3.5 billion annually. Additionally, large amount of payments are made by mortgage holders estimated at $20 billion (Dunning 4).
Conclusion
The real estate business has taken another form and house owners are taking advantage of low interest rates offered in the market. The paper has addressed significant issues facing home buyers. Buying a personal home requires a lot of investment and knowledge of the financial market in order to avoid losing money. In addition, the mortgage market is extremely sophisticated and hard to describe but with the reduced loan amortization, potential home owners have a reason to smile. The financial deregulations and innovations benefit many households and every person should aim at investing to own a house because it is a risk worth taking (Gerardi, Rosen and Willen 55).
Works cited
Bernanke, Ben S. “The Housing Market and Subprime Lending.” Speech to the 2007
International Monetary Conference, Cape Town, South Africa. 2007. Available at:
www.federalreserve.gov/boarddocs/
speeches/2007/20070605/default.htm
Dunning, Will. Annual State of the Residential Mortgage Market in Canada. Canadian
Association of Accredited Mortgage Professionals. 2012
Estes, Jack C., Dennis R. Kelley, and Charles Freedenberg. McGraw-Hill's interest amortization
tables. 3rd ed. New York: McGraw-Hill, 2006. Print.
Gerardi, K., Rosen, H. S. and Willen, P. “Do Households Benefit from Financial
Deregulation and Innovation? The Case of the Mortgage Market.” CEPS Working Paper No. 141, Center for Economic Policy Studies. 2007.
Green, Richard K. and Wachter, Susan M. “The American Mortgage in Historical and
International Context.” Journal of Economic Perspectives, Fall 2005, 19(4)
