Types of mortgages, the role of interest rate, and the process of foreclosures

An open mortgage is for you if you wish to make high mortgage payments or pay off your loan entirely without penalty. An open mortgage gives you the greatest amount of freedom. These homeowners are willing to accept a slight interest rate fluctuation in exchange for the ability to pay off a portion or the entire mortgage before the term ends.

W2022 LAW230-204 Business Law
Topic: types of mortgages, the role of interest rate, and
the process of foreclosures
Due Date and Time: 20 Feb, 2022; 11:59 pm
Submitted to: Rafatunnisa Nawaz
Submitted by
Navjot Kaur (A00118003)

Table of Content
MORTGAGE 2
TYPES OF MORTGAGE 2
Open mortgage 2
Closed mortgage 2
Convertible mortgage 2
Hybrid mortgage 3
Reverse mortgage 3
ROLE OF INTEREST RATE 3
Fundamentals of valuing 3
Flows of capital 4
Rates of discount 4
The bottom Line 4
PROCESS OF FORECLOSURE 5
Phase 1 - Payment Default 5
Phase 2 - Notice of Default 5
Phase 3 - Notice of Trustee’s sale 5
Phase 4 - Trustee’s sale 6
Phase 5 - Real Estate owned ( REO) 6
Phase 6 – Eviction 6
REFERENCE 6

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Types of mortgages, the role of interest rate, and the process of foreclosures
MORTGAGE
It is a loan used to buy or keep a house, land, or other piece of real estate. The borrower
promises to pay the lender over a period of time, usually in a series of regular instalments
divided into principal and interest. The loan is secured by the property. A borrower must
apply for a mortgage through their preferred lender and meet a number of criteria, including
minimum credit scores and down payments. Before they reach the closing stage, mortgage
applications go through an extensive underwriting process. Conventional and fixed-rate loans
are two types of mortgages that differ dependent on the borrower's demands.
TYPES OF MORTGAGE
Open mortgage
An open mortgage is for you if you wish to make high mortgage payments or pay off your
loan entirely without penalty. An open mortgage gives you the greatest amount of freedom.
These homeowners are willing to accept a slight interest rate fluctuation in exchange for the
ability to pay off a portion or the entire mortgage before the term ends.
Closed mortgage
A closed mortgage is a loan with a pre-determined interest rate and term. If a buyer utilises a
closed mortgage, he or she will almost certainly have to pay a penalty to the lender if the loan
is paid off early. The borrower can choose between a fixed rate and a variable/adjustable rate
with a closed mortgage, depending on their needs and preferences. More information on the
various sorts of rates can be found under "Rates."
Interest rates for closed mortgages are often cheaper than open mortgages. Most lenders will
enable borrowers with closed mortgages to make a one-time lump sum payment of up to
10%, 15%, or 20% of the initial loan amount without penalty once a year. This payment is
applied to the principal portion of the debt. Many lenders may additionally allow a borrower
to boost their monthly mortgage payment by up to 10%, 15%, or 20% in addition to the lump
sum payment.
Convertible mortgage
it is a loan that allows homeowners to change the type of mortgage they have during the
length of the loan. A convertible mortgage is the best option for homeowners who want to
start with an open mortgage and then lock into a closed loan. It has lower interest rates than
an open mortgage and can be converted to a closed term. Most lenders can convert a variable
rate mortgage to a fixed rate mortgage if the borrower wants to switch before the term ends.

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Types of mortgages, the role of interest rate, and the process of foreclosures
Hybrid mortgage
When more than one type of mortgage is included in a single mortgage registration, it is
referred to as a hybrid mortgage. A fixed rate portion, variable rate portion, line of credit
portion, or any combination of these could be included in the registration. Each lender will
have their own name for this form of mortgage, which will allow for anywhere from two to
one hundred different products to be included in the mortgage registration. This product is
frequently recommended for the astute borrower who intends to use it as part of a larger
financial strategy.
Reverse mortgage
This type of mortgage allows homeowners 55 and up to convert their home equity into a
lump sum payment or monthly cash payment(s), which is usually used to cover living
expenses. The lender takes a loan against a homeowner's equity and gives it to the borrower.
The loan debt is due when the homeowner no longer desires to live in the home as their
primary residence or when the borrower passes away. The remaining loan sum is paid off
using the proceeds of the property's sale, either by the owner or their heirs. (1)
ROLE OF INTEREST RATE
Interest rates, just like any other investment vehicle, have a significant impact on the value of
income-producing real estate. This is especially true of interbank and Treasury bill rates (T-
Bills). Many people mistakenly believe that the current mortgage rate is the only deciding
element in real estate valuation since their impact on an individual's ability to purchase
residential properties (by increasing or decreasing the cost of mortgage capital) is so
significant. However, mortgage rates are simply one type of interest-related element that
affects home values. Interest rates influence property values in a variety of ways because they
influence capital flows, capital supply and demand, and investors' necessary rates of return on
investment.
Fundamentals of valuing
The availability and demand for homes, as well as the cost of creating new properties, are all
factors that influence real estate values. But there's more to property valuation than that,
especially when you consider how interest rates, capital flows, and financing rates are
controlled by the government. To grasp these dynamics, you'll need a rudimentary
comprehension of the income approach, which is the most often used valuation method
among investors. The income technique, which is used by commercial property appraisers
and underwriters for real-estate backed investments, is very similar to the discounted cash
flow analysis that is used for equity and bond investments. Property revenue is forecasted in
the form of anticipated lease payments or, in the case of hotels, expected occupancy
multiplied by the average cost per room. The analyst gets at the net operating income (NOI)
or cash flow that remains after all of the operating expenses after accounting for all of the
property-level costs.

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Types of mortgages, the role of interest rate, and the process of foreclosures
We get net cash flow by removing any linked capital costs, investment capital for property
maintenance or repair, and other non-property-specific expenses from NOI (NCF). NCF
equals cash available to investors—just like cash from dividends—and is used to value
equities and fixed-income assets because properties don't often keep cash or have a specified
payout policy. The property value is calculated by capitalising dividends or discounting the
cash flow stream (including any residual value) over a specific investment period.
Flows of capital
Interest rates have a big impact on financing costs and mortgage rates, which has a big impact
on property costs and values. The most significant influences on required rates of return
(RRR) and investment values are supply and demand for capital and competing investments.
The Federal Reserve Board's policy has had a direct impact on the value of all investments as
it has shifted its attention away from monetary policy and toward interest rate management as
a means of stimulating the economy or preventing inflation. The cost of capital falls when
interbank exchange rates fall, allowing more money to flow into the system. When rates
climb, however, the amount of money available to borrow falls. Changes in interbank lending
rates add or subtract capital available for real estate investment. Demand and supply—that is,
the money available for real estate acquisitions and development—are affected by the amount
of capital and the cost of capital. When capital is scarce, capital providers, for example, are
more likely to lend at a lower percentage of inherent value or further up the capital stack. As
a result, loans are made at lower loan-to-value (LTV) ratios, resulting in lower leveraged cash
flows and property values.
Rates of discount
Interest rates have the most noticeable impact on real estate values when discount or
capitalization rates are calculated. A capitalization rate can be thought of as an investor's
needed dividend rate, whereas a discount rate can be thought of as an investor's required total
return rate. The capitalization rate is equal to (K-g), where g is the predicted increase in
income or capital appreciation.
The bottom Line
Mortgage rates are vital to pay attention to since they have a direct impact on home values.
Interest rates fluctuate, which has an impact on many areas of real estate. Interest rates have
an impact on capital availability and investment demand in addition to the price of your new
property. These money transfers have an effect on property supply and demand, as well as
property prices. In addition, interest rates have an impact on returns on alternative
investments, and prices shift to reflect the inherent risk in real estate investments. During
moments of credit market destabilisation, these variations in necessary rates of return for real
estate also occur. Although mortgage rates have no direct impact on home prices, they do
have an impact on housing supply, which has a significant impact on pricing. Existing
homeowners are less likely to sell and enter the market when mortgage rates rise. As a result,
there are fewer available properties for sale, driving increasing demand and prices.

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Types of mortgages, the role of interest rate, and the process of foreclosures
Homeowners feel more at ease selling their homes when interest rates are low. This raises
inventory and shifts the market in favour of buyers, giving them greater options and
bargaining power. (2)
PROCESS OF FORECLOSURE
The process through which a lender recovers the money owing on a defaulted loan by selling
or taking control of the property is known as foreclosure. The foreclosure process differs by
state, however there are six basic stages.
Phase 1 - Payment Default
When a borrower misses at least one mortgage payment, the term "payment default" is used,
albeit the exact definition varies per lender. The lender will contact you by letter or phone
when the first payment is missed. Mortgage payments are typically due on the first of every
month, with many lenders extending a grace period until the 15th. The lender may then assess
a late fee and send a missed payment notice.
The lender will likely contact you by phone after the second month of late payments.
However, the lender may still be ready to negotiate with the borrower to establish payment
arrangements, such as making a single payment to avoid falling farther behind. When a
borrower misses three payments in a row, the lender typically issues a demand letter (or
notice to accelerate) specifying the amount owed and giving the borrower 30 days to pay up.
Returning to good standing, being amended, or having the property repossessed or sold
through foreclosure or voluntary surrender are the three options for a mortgage in default.
Phase 2 - Notice of Default
After four months of missed payments, a notice of default (NOD) is sent (90 days past due).
Before legally initiating the foreclosure process, the borrower is given 30 days to make up for
past due payments. Most lenders will not send a default notice until the borrower has missed
90 days of payments (three consecutive missed payments). As a result, a borrower can often
fall behind on payments for a month or two before risking foreclosure.
Phase 3 - Notice of Trustee’s sale
The process for starting foreclosure varies by state. In some states, nonjudicial foreclosures
are possible, requiring simply the submission of documents with the appropriate court to
begin the process. The foreclosure procedure might move swiftly as a result of this. In other
states, judicial foreclosures are used, which necessitates court approval for each step, making
the process take a little longer. The lender's attorney or foreclosure trustee will schedule a
sale of the property after the forms are filed with the court or the requisite consent is
obtained. A notice of trustee's sale (also known as a notice of sale) is then recorded in the
county where the property is located, detailing the exact time and location of the sale, as well
as the property's minimum opening bid.

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Types of mortgages, the role of interest rate, and the process of foreclosures
In the weeks leading up to the auction, the lender must additionally publicize the property in
general (newspaper advertising, signs, etc.) announcing that it will be sold at public auction.
The duration between receiving a demand letter and the auction date varies by state, but it
might be as little as 2-3 months. The borrower can establish payment arrangements or pay the
whole amount owed up until the auction date, including attorney expenses incurred by the
lender to begin the process.
Phase 4 - Trustee’s sale
The property is currently up for public auction, and the highest bidder who fits all of the
criteria will be granted the property. The lender (or a firm representing the lender) will
determine an opening bid based on the outstanding loan's value, as well as any liens, unpaid
taxes, and closing costs. A trustee's deed upon sale will be given to the winning bidder once
the highest bidder has been confirmed and the sale has been completed. The purchaser then
owns the property and has the right to possession immediately.
Phase 5 - Real Estate owned ( REO)
The lender will establish a minimum bid based on the property's appraised value, the
remaining mortgage balance, any additional liens, and legal expenses. If the property does not
sell at the public auction, the lender will take ownership and try to sell it through a broker or
with the help of a real estate-owned (REO) asset manager.
Phase 6 – Eviction
If the debtors are still residing in the property after the auction and a new owner is named—
either the auction winner or the bank if the property is not sold—they are given an order to
leave. This eviction notice requires all occupants of the house to leave immediately. The
residents may be given several days to leave and remove their personal items. The premises
will then be visited by the local sheriff or law enforcement, who will remove them and
confiscate any remaining items. (3)
REFERENCE
1. 5 Types Of Mortgage Loans For Homebuyers | Bankrate. (2022). Retrieved 20
February 2022,
https://www.bankrate.com/mortgages/types-of-mortgages/amp/
2. Why Is Interest Rate Important When Buying a House?. (2022). Retrieved 20
February 2022,
https://www.homes4saleingr.com/why-is-interest-rate-important-when-buying-a-
house

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Types of mortgages, the role of interest rate, and the process of foreclosures
3. (2022). Retrieved 20 February 2022,
https://images.kw.com/docs/2/7/6/276133/1302842821943_ForeclosureFlowChart.
pdf