Examples of Variable Rate Mortgage in the following topics:
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- Prepayment risk is the risk that the buyer goes ahead and pays off the mortgage.
- Interest rate risk refers an asset whose terms can change over time, such as a Variable Rate Mortgage payment.
- The mortgages often featured variable rate annuities, meaning that the interest rate terms of the mortgage started low and increased over time.
- Buyers worried about an adjustment to their interest rate, and all of a sudden a 1500 monthly payment became 2000.
- When interest rates climbed 2 percentage points and the mortgage climbed to $2000, some owners had to default (stop making payments) .
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- Interest rates became volatile during the 1980s, forcing banks to become more concerned with interest-rate risk.
- Interest-rate sensitive items are short-term securities, variable interest-rate loans, and short-term deposits.
- If the interest-rate sensitive liabilities equal the interest-rate sensitive assets, then fluctuating interest rates do not affect bank profits.
- Some banks grant loans to borrowers with variable interest rates.
- For example, a variable interest rate mortgage is an adjustable-rate mortgage (ARM).
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- For example, a bank granted a mortgage for $60,000 at an interest rate of 12% APR.
- If a mortgage is monthly, then you divide the interest rate by 12 and multiply the number of years by 12.
- Interest rate, i, is the APR interest rate divided by 12.
- Amortization table can also handle balloon payments and variable interest rate mortgages.
- Moreover, variable-interest rate loan is the bank can adjust the loan's interest rate as market interest rates change.
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- The purpose of the "return on investment" metric is to measure per-period rates of return on dollars invested in an economic entity.
- ROI is often compared to expected (or required) rates of return on dollars invested.
- Complications in calculating ROI can occur when a real estate property is refinanced, or a second mortgage is taken out.
- Complex calculations may also be required for property bought with an adjustable rate mortgage (ARM) with a variable escalating rate charged annually through the duration of the loan.
- (To know more about ARM, check out: Mortgages: Fixed-Rate Versus Adjustable-Rate. )
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- A mortgage is a loan secured by real property.
- It requires a mortgage note affirming the existence of the loan and the encumbrance of the realty through the granting of a mortgage securing the loan.
- Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off the loan, and other characteristics can vary considerably.
- Many types of mortgages are used worldwide, though several characteristics, subject to local regulations and legal requirements, define most mortgages:
- Interest: Interest may be fixed for the life of the loan or variable, and it may change at certain pre-defined periods; the interest rate may rise or fall.
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- Floating rate bonds are bonds that have a variable coupon equal to a money market reference rate (e.g., LIBOR), plus a quoted spread.
- Floating rate bonds (FRBs) are bonds that have a variable coupon, equal to a money market reference rate, like LIBOR or federal funds rate, plus a quoted spread (i.e., quoted margin).
- In the United States, government sponsored enterprises (GSEs), such as the Federal Home Loan Banks, the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac), are important issuers.
- FRBs carry little interest rate risk.
- Thus, FRBs differ from fixed rate bonds, whose prices decline when market rates rise.
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- Banks persuaded homeowners to accept adjustable-rate mortgages (ARMs).
- Thus, a mortgage payment changes as the interest rate changes.
- At the beginning, homeowners paid low mortgage payments, but payments would explode in size as interest rates reset to higher levels.
- Credit agencies always rated CDOs with an AAA credit rating, even though some CDO's funds contained subprime mortgages.
- Unemployment rate soared to 10%, and households, especially the subprime market, began defaulting on their mortgages in record numbers.
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- The most common type of debt refinancing occurs in the home mortgage market.
- To reduce or alter risk (e.g. switching from a variable-rate to a fixed-rate loan)
- To free up cash (often for a longer term, contingent on interest rate differential and fees)
- Calculating the up-front, ongoing, and potentially variable transaction costs of refinancing is an important part of the decision on whether or not to refinance.
- In some jurisdictions, refinanced mortgage loans are considered recourse debt, meaning that the borrower is liable in case of default, while un-refinanced mortgages are non-recourse debt.
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- The interest rate is the rate at which interest is paid by a borrower (debtor) for the use of money borrowed from a lender (creditor).
- The interest rate is taken into account when dealing with economic variables such as investment, inflation, and unemployment.
- Interest rates also influence inflationary expectations.
- Higher rates discourage economically unproductive lending such as consumer credit and mortgage lending.
- The interest rates reached 14% in 1969 and lowered to 2% by 2003.
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- Floating rate debt is loans with a variable interest rate.
- If the interest rate increases, then borrowers must pay more interest on their payments.
- Securitization is the bundling of illiquid assets like mortgages into a fund.
- A fund offers different tranches with different credit ratings and rates of return.
- If banks retained their rigid lending standards and the creditrating agencies accurately rated the CDOs and ABS, then the housing bubble would still form but at a slower rate.