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]

Premium Percentage The premium percentage used here is based on a borrowers credit scores. Higher credit scores equal lower rate. A range of 10% to 40% was used. This value is a constant value.

Premium Percentage = 0.2

Insurance Per Month

This is the monthly amount of insurance which forms part on monthly loan repayment amount. This is amount collected is collected in escrow accounts and paid to the insurance company periodically.

Insurance Per Month = Insurance/12

Tax Rate This is the property tax rate of the Czech Republic.

Tax Rate = 0.04

Tax Per Month This is the monthly amount of tax which forms part on monthly loan repayment amount. This is amount collected is collected in escrow accounts and paid to the government periodically.

Tax Per Month = Tax / 12

Value of Property The is the price of the property a borrower is taking a loan to purchase. A range of 1,500,000 CZK to 10,000,000 CZK was used. This value is a constant value and the first simulation is done with 2,000,000 CZK

Value of Property = 2,000,000

Down Payment This is the percentage of the value of the property required before loan is given. In the Czech Republic, a down payment of 20% is usually required for mortgages.

Down Payment = 0.2 * Value of Property

Life of Loan (Years) This is the total number of years required to repay the entire loan amount. This ranges between 10 to 35 years. The first simulation is done with 30 years

Life of Loan (Years) = 30

Repayment Period This is the total number of months required to repay the entire loan amount.

Repayment Period = "Life of Loan (years)"* 12