Question

Which loan package, typically used in commercial lending, rewards both the lender and the borrower?

a) Fixed-rate mortgage
b) Balloon mortgage
c) Shared appreciation mortgage
d) Interest-only mortgage

Answer 1

c) Shared appreciation mortgage

The loan package that typically benefits both the lender and borrower in commercial lending is the shared appreciation mortgage, which allows lenders to share in the property's appreciation. For homeowners with an adjustable-rate mortgage, a fall in inflation is likely to decrease their interest rates and payments. Borrowers benefit most when interest rates are lower than inflation, while lenders benefit when rates exceed inflation.

Step-by-step explanation:

The type of loan package typically used in commercial lending that rewards both the lender and the borrower is the shared appreciation mortgage (SAM). This type of loan allows the lender to share in the increased value of the property in exchange for offering a below-market interest rate. It benefits the borrower by providing reduced upfront loan costs, while the lender potentially earns more through the property's appreciation.

In the case of an adjustable-rate mortgage (ARM), if inflation unexpectedly falls by 3%, the market interest rates are likely to decrease as well. Consequently, a homeowner with an ARM could expect their interest rate, and potentially their monthly payments, to decrease, as ARMs have interest rates that adjust with the market.

When analyzing the relationship between mortgage interest rates and the rate of inflation over different years, it can be said that it would have been better to be a borrower when interest rates were lower than the inflation rate, because in real terms, the cost of borrowing was lower. Conversely, it would have been preferable for the bank to be lending when interest rates were higher than the rate of inflation, as this signifies that the real value of the repayments received over time is higher due to the relative decrease in inflation.

Answer 2

A Shared Appreciation Mortgage rewards both lender and borrower, as the lender gets a share of the property's appreciation. With an adjustable-rate mortgage, if inflation falls by 3%, the ARM's interest may decrease, benefiting the homeowner. Loan conditions and market factors like inflation influence whether it's better to be a lender or a borrower in a given year.

Step-by-step explanation:

The type of loan package typically used in commercial lending that rewards both the lender and the borrower is the Shared Appreciation Mortgage (SAM). This sort of mortgage allows the borrower to pay a below-market interest rate on the loan. In return, the lender shares in a portion of the appreciation of the value of the property, potentially earning more than with a traditional mortgage if the property value increases significantly.

When considering adjustable-rate mortgages (ARMs), if inflation falls unexpectedly by 3%, the interest rates in the economy are likely to decrease. This decline means that the interest rate on an ARM may go down, leading to lower monthly payments for homeowners with this type of mortgage. This change can make ARMs attractive to borrowers expecting a stable or falling inflationary environment.

It's important to compare the interest rates and inflation rates when considering the efficacy of borrowing or lending. In general, when interest rates are lower than the inflation rate, it's better for borrowers, while it's better for lenders when interest rates are higher than inflation rates. Hence, analyzing both aspects can determine the most beneficial years for borrowers versus lenders.