Question

RE FIN Week 3 - HW

What is a Balloon Payment and what are the Risks associated by it?

What is the link between inflation and interest rates when looking at Mortgages?

Explain the concept of Liquidity Risk?

What are Closing Costs and how do they add to the Cost of a Loan?

What is a Reverse Annuity Mortgage?

PLEASE ANSWER THE FOLLOWING QUESTIONS IF ALL ANSWERED CORRECTLY WILL RATE 5 STARS NO SCREEN SHOTS OR IMAGES OF RESPONSE. PLEASE TYPE YOUR ANSWER OR UPLOAD DOCUMENT IF REQUIREMENTS MENTIONED ABOVE ARE NOT MET I WILL GIVE A NEGATIVE RATING

Answer 1

1. Balloon payment is the lump sum payment which is attached to a loan, mortgage, or a commercial loan. This payment is usually made towards the end of the loan period. Balloon payment is higher than what you might be paying towards the loan on a monthly basis.

Risk associated with balloon payment :

- balloon payment / mortgages are highly risky, and one should consult with a financial planner before taking out such a mortgage.

-Balloon mortgage rates are typically lower than traditional mortgages.

-If one can't pay off balloon mortgage when the balloon payment is due, he will have to refinance his mortgage.

- Foreclosure is the most serious risk of a balloon mortgage, which account for a much higher percentage of foreclosures than they do of loans.

2. Link between inflation rate and interest rate.

• Interest rates can influence the rate of inflation and the rate of economic growth.
• Generally, an increase in inflation leads to higher interest rates.
• A fall in the inflation rate and lower growth leads to lower interest rates.

3. Liquidity risk is the risk that a company or bank may be unable to meet short term financial demands. This usually occurs due to the inability to convert a security or hard assets to cash without a loss of capital and/or income in the process.

Liquidity risk is the potential that an entity will be unable to acquire the cash required to meet short or intermediate term obligations. Following are examples of liquidity risk:

A/c receivable, bank deposit, debt term, marketable security etc.

4. Closing costs are costs associated with your loan, and it's important to budget for them. Closing costs may include discount points, recording fees, loan origination fees , notary fees , attorney fees and much more. They usually total between 2 and 5 percent of your home's purchase price.

5.A mortgage in which a homeowner's equity is gradually depleted by a series of payments from the mortgage holder to the homeowner. Thus, a reverse annuity mortgage increases in size as the annuity payments continue. A reverse annuity mortgage is used primarily by elderly homeowners who wish to convert the equity in their homes into a stream of retirement income payments.

Reverse mortgages are often considered a last-resort source of income, but they have become a useful retirement planning tool for some homeowners.