Finance Articles

Mortgage Refinance Loan - The Facts And The Figures Explained

A mortgage loan is a loan secured by real property through the use of a mortgage (a legal instrument). Mortgage loans are generally structured as long-term loans, the periodic payments for which are similar to an annuity and calculated according to the time value of money formulae.

For borrowers with superior credit, government loans and ideal profiles, this securitization keeps rates almost artificially low, since the pools of funds used to create new loans can be refreshed more quickly than in years past, allowing for more rapid outflow of capital from investors to borrowers without as many personal business ties as the past. It may by law deal only with government-supervised lenders such as savings and loan associations, savings banks, and commercial banks; its programs cover conventional whole mortgage loans, participations in conventional loans, and FHA and VA loans. These loans may be useful for people who have a lot of equity in their home and want to lower monthly costs; for investors, allowing them the flexibility to choose which payment to make every month; or for those with irregular incomes (such as those working on commission or for whom bonuses comprise a large portion of income).

In the last case, mortgage insurance can be dropped when the lender informs the borrower, or its subsequent assigns, that the property has appreciated, the loan has been paid down, or any combination of both to relegate the loan-to-value under 80%. All of these methods are still compensating the lender as if they were charging interest, but the loans are structured in a way that in name they are not, but they share the financial risks involved in the transaction with the homebuyer. While often defined or defended as lending to borrowers with compromised credit histories, the Wall Street Journal reported in 2006, 61% of all borrowers receiving subprime loans had credit scores high enough to qualify for prime conventional loans.

Opponents alleged subprime lenders engaged in predatory lending practices such as deliberately targeting borrowers who could not understand what they were signing, or lending to people who could never meet the terms of their loans. Generally, the credit profile keeping a borrower out of a prime loan may include one or more of the following:Two or more loan payments paid past 30 days due in the last 12 months, or one or more loan payments paid past 90 days due the last 36 months;Judgment, foreclosure, repossession, or non-payment of a loan in the past;Bankruptcy in the last 7 years;Relatively high default probability as evidenced by, for example, a credit score (FICO) of less than 620 (depending on the product/collateral), or other bureau or proprietary scores with an equivalent default probability likelihood. In most cases, should these loans default, the Servicing is passed to Special Servicers who stand to reap significant Workout, Foreclosures and Real estate owned (REO) management fees.

To meet demand, lenders have seen that a tiered pricing arrangement, one which allows these individuals to receive loans but pay a higher interest rate and higher fees, may allow loans which otherwise would not occur.

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