Financial and Accounting at a Hospotal

Financial/Accounting

One of the possible long-term debt alternatives that hospital may consider is conventional mortgage. First of all, we need to describe some of the features that conventional mortgage involves and, thereafter, refer to why this alternative may be preferred, while at the same time pointing out and addressing two of its most important characteristics.

Following a definition from one of the most important mortgage companies, Alpha Mortgage Services Inc., a conventional mortgage is "a loan that is long-term (typically 30 or 15 years) and meets the guidelines as put forth by FNMA (Federal National Mortgage Association) and FHLMC (Federal Home Loan Mortgage Corp.)."

In principle, as listed by the two associations, these mortgage conditions often include "satisfactory types of borrowers, kinds of property, and loans amounts up to $300,700." In general, if the mortgage loan abides for more than 80% of the total value of the purchase, a mortgage insurance is required. This is usually paid on a monthly basis.

There are three types of conventional mortgages to be considered. The first one is the fixed rate conventional mortgage. This implies a fixed interest rate, decided upon at the beginning of the mortgage contract and which remains the same for the entire period of time the client pays out the mortgage. The loan amount is also paid in equal monthly payments. While ranging from 15 to 30 years, it is typical for the shorter period of time to bear a smaller interest rate as well. One of the main characteristics of the fixed rate conventional mortgage is that "more interest than principal is paid in the early years of the loan."

The second type of conventional mortgage is the adjustable rate conventional mortgage. The main difference between the two is the fact that the interest rate and monthly payment vary according to an index determined at the beginning of the mortgage contract. Again different from the previous type of conventional mortgage, the interest rate during the first months is usually lower than the fixed rate conventional mortgage and gradually increases for the last payment periods.

On one hand, the adjustable rate conventional mortgage has the obvious advantage that it better covers initial payments, thus supporting the idea that overall lower payment rates can encourage the mortgage users. On the other hand, the fact that payments are variable may create a psychological impression that, at one point or another, the user will be forced to pay more than he can afford at that certain point.

Finally, we have the balloon conventional mortgages. This is the type of mortgage that "has a fixed interest rate, but at some point requires the borrower(s) to make a final lump sum payment." The main characteristic of such a conventional mortgage is the fact that after a certain period of time, usually 5 or 7 years, during which the user pays a fixed interest rate and overall fixed monthly payments, he will be paying the final amount in the form of a lump sum. However, the practice generally allows for the user to refinance on the market and have another conventional mortgage for the remaining period of time, if this exists.

If we look at these three types of conventional mortgages and the characteristics each bear, as compared to the needs of hospital, the most suitable seem to be the fixed rate conventional mortgage and the balloon conventional mortgage. There are several reasons for this.

First of all, for a hospital, the budget is generally set ahead for a period of several years. In this sense, financial stability and a clear sense of what needs to be made in the next period of time is most important. If we consider the adjustable rate conventional mortgage, for example, it may occur that somewhere in the 10th year, the monthly rate, including interest rate, will suddenly double its value.

It is, in this sense, a question of security and risk avoidance. In a financially insecure environment, an environment where state budgeting and financing for hospitals may be influenced by issues such as a change in the governing party, a change in the state priorities or anything like this, it is important to know that, while on one hand your sources of financing are variable, including here the possibility that sponsorship contacts may be less important in some years, your financial obligations remain stable and are not subject to modifications.

A second important advantage for the two types of conventional mortgage schemes I have mentioned is the fact that they seem to be more addressed to long-term activities than the adjustable rate conventional mortgage. Indeed, the adjustable rate advantages people who will prefer to change their asset after the first years and will benefit form the lower interest rate and lower overall payment rates in the first few years when the asset will be used.

On the other hand, corroborated with the stability argument previously mentioned, a long-term investment goes hand in hand with a long-term mortgage loan, either of the two. A hospital is the best example in this sense. Generally, a hospital may be regarded as a non-profit organization, where the humanitarian mission often overcomes the profit one. In this sense, it is clearly that building and operating a hospital is a long-term activity where a stable financial situation is primordial. A secure payment, where all information is available for the entire period the loan is made, is probably the best solution.

In terms of percentage financing available, the limitations are dictated by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. These are in the amount of $300,700, with $451,050 for Alaska and Hawaii. These restrictions may somewhat limit the extent to which the conventional mortgage financing can be used and will include a lesser list of projects because of this amount.

In this sense, the actual long-term debt solution is very much determined by the actual destination of the money. An extension of the available space or the construction of a smaller building on the hospital's premises may benefit from the advantages of conventional mortgage. On the other hand, more costly projects, including the construction of entire hospitals from the very beginning, will probably enjoy other forms of long-term debts, including jumbo mortgages, which permit for higher loans.