User:Edema

Introduction

A mortgage is a form of loan used to purchase or maintain a home, land, or other type of real estate. The borrower commits to repay the lender over time, often through a series of monthly payments divided into principal and interest repayments. These components are are influence by different factors and elements and for the purpose of this work, only factors relevant to the simulation were selected. Each component and their associated factors will be further explained under the variable section of this work. The monthly mortgage payment is made up of four key components: Principle, Interest, Taxes, and Insurance (PITI). Mortgages in the Czech Republic, like in the rest of the world, typically have a payback duration of 10 to 30 years, however this can be extended.

Borrowers can choose from a variety of mortgage loans, the most common of which are fixed-rate mortgages and adjustable-rate mortgages (ARMs).

Fixed-Rate Mortgages A fixed-rate mortgage is the most common form. The interest rate on a fixed-rate mortgage remains constant throughout the loan's duration, as do the borrower's monthly mortgage payments. A conventional mortgage is another name for a fixed-rate mortgage.

Adjustable-Rate Mortgages An adjustable-rate mortgage (ARM) has an interest rate that is fixed for a set length of time before changing based on market interest rates. The initial interest rate is frequently below market, making the mortgage more reasonable in the near term but potentially less affordable in the long run if the rate rises significantly.

This model simulates mortgage repayments based on the principal, interest, tax and insurance. This simulation will show how default, extra payments, and payback duration affect early or late repayment or inability to repay. This study is based on the Fixed-Rate Model and focuses on the mortgage market in the Czech Republic.

Simulation Tool Used

Vensim PLE

Variables

Principal (Mortgage Loan Amount) The principle of your mortgage loan is the amount payable before interest is calculated. This is the property's worth less the down payment.

Principal (Mortgage Loan Amount) = Value of House - Down Payment

Interest An interest rate is a percentage that indicates how much you will pay your lender as a monthly fee for borrowing money. Interest is calculated by your mortgage lender as a proportion of your principle over time.

Interest = INTEG [(Interest Rate * "Principal (Mortgage Loan Amount)"), 0]

Tax The amount of property tax you will pay is decided by the state, city, and the value of your home.

Tax = INTEG [(Tax Rate * Value of House), 0]

Insurance Mortgage insurance protects the lender if a borrower defaults on the loan. For this work, it is approximated using a premium rate and the value of the house. Your credit score is also considered while calculating the premium rate.

Insurance = INTEG [(Premium Percentage * Value of House), 0]