Chapter 10 - Real Estate Finance Flashcards
Principal
Original amount of the loan borrowed that must be repaid by the end of the loan term.
Home Loan Interest
The charge in dollars for the use of money over a period of time / The amount that the lender charges for providing the loan, which is typically expressed as a percentage of the original loan amount
Loan Amortization
The liquidation of a financial obligation on an installment basis (i.e., Process of reducing/paying off a debt by making regular payments over the time period/term of the loan)
Debt Service
amount of funds needed to repay the interest and principal on the loan for a particular time period
PITI
Principal, Interest, Taxes, and Insurance - typically represents the full amount of a monthly mortgage payment, which includes the escrow amount for real estate taxes and homeowner’s insurance
Equity
value of your home less the amount that remains on your mortgage
Usury
illegal practice of lending money at an unreasonably high interest rate (greater than that permitted by law)
Discount / Mortgage Points
The amount of money the borrower must pay the lender to get a mortgage at a stated interest rate (i.e., prepaid interest, “buying down the rate” - fees that can be paid directly to the lender at the time of the loan closing that will reduce the interest rate.)
- -On a typical mortgage, a lender usually reduces the interest rate of the loan by 1/4% per point paid. Homeowners can usually purchase 1 point for 1% of the original mortgage amount (NOT the purchase price).
- -The borrower does not have to opt-in to paying discount points, but doing so will reduce their monthly loan payments since their interest rate will be lowered.
Rate of Return / Yield
amount of annual income from an investment, which is typically expressed as a %. OR The interest earned by an investor on an investment (or by a bank on money it has loaned).
Loan Origination Fees
expenses the mortgage lender charges for setting up, securing, and closing a home loan - these fees pay for all the research and setup of the home loan by the lender for the borrower. These fees are required to be disclosed on the Good Faith Estimate and they include expenses such as reviewing the loan app, verifying info, pulling credit reports, the appraisal fee, origination fee, processing/underwriting fee, flood certification fee, and tax service fee.
–Vary by lender, but are typically 0.5% - 1% of the home loan (NOT the purchase price)
Loan Value
amount of money that the borrower receives that s/he must repay
Federal Home Loan Mortgage Corporation (FHLMC) (Freddie Mac)
An independent stock company which creates a secondary market in conventional residential loans and in FHA and VA loans by purchasing mortgages.
Federal National Mortgage Association (FNMA) (Fannie Mae)
A New York stock exchange company. It is a public company that operates under a federal charter and is the nation’s largest source of financing for home mortgages. Fannie Mae does not lend money directly to consumers, but instead works to ensure that mortgage funds are available and affordable, by purchasing mortgage loans from institutions that lend directly to consumers.
Federal Reserve System - “The Fed”
The federal banking system of the United States under the control of central board of governors (Federal Reserve Board) involving a central bank in each of twelve geographical districts with broad powers in controlling credit and the amount of money in circulation.
Government National Mortgage Association (GNMA) (Ginnie Mae)
A government-owned corporation within the U.S. Department of Housing and Urban Development (HUD) that guarantees securities backed by mortgages that are insured or guaranteed by other government agencies.
Primary Mortgage Market
The marketplace whereby loans are originated.
Secondary Mortgage Market
The market where lenders sell their loans to the large secondary marketing agencies (FNMA, FHLMC, and GNMA) or to other investors.
Promissory Note
Following a loan commitment from the lender, the borrower signs a legally binding note, promising to repay the loan under stipulated terms. The promissory note establishes personal liability for its payment (The evidence of the debt.) and outlines the terms of the loan, such as the amount, interest rate, and due dates.
Acceleration Clause
A condition in a real estate finance instrument giving the lender the power to declare all sums owed to the lender immediately due and payable upon the happening of an event, such as sale of the property, or a delinquency in the repayment of the note.
Amortized Loan
A loan to be repaid, interest and principal, by a series of regular payments that are equal or nearly equal, without any special balloon payment prior to maturity.
Escalator Clause
The right reserved by the lender to increase the amount of the payments and/or interest upon the happening of a certain event. Specific conditions for this clause will be listed, such as cost of living increases.
Prepayment Penalty
The charge payable to a lender by a borrower under the terms of the loan agreement if the borrower pays off the outstanding principal balance of the loan prior to its maturity. Penalty cost is usually a percentage of the amount borrowed of a certain number of months’ worth of interest payments.
–interest is how lenders make money
Secured vs. Unsecured Loans
- -Secured loans are backed by collateral (for example, with home buying, collateral is generally the home itself)
- -Unsecured loans are given based on personal credit history & financial security of an individual (for example, credit cards and personal loans are unsecured)
Straight Note / Term Loan / Interest-only Loan
A non-amortizing loan in which a borrower repays the principal in a lump sum at maturity (balloon payment) while interest is paid in installments or at maturity. These loans are beneficial to borrowers unlikely to remain in their home for a long time, but they end up paying higher interest rates. The borrower must be confident in one of the following:
- -s/he will be able to pay off the principal in full at the end of the term
- -s/he will be able to sell the home to repay the loan at the end of the term
- -s/he will be able to secure a traditional home loan at the end of the term to pay off the term loan
Full vs. Partial Amortization
Full amortization - amount of interest & principal paid by the borrower is spread out over the entire term of the loan, with each monthly payment, and the principal is reduced to $0 at the end of the loan (initially more is paid towards interest, but towards the end, the borrower is paying more towards principal)
Partial amortization - accrued interest and some of the principal is paid during the loan term, but not enough for the loan balance to be $0 at the end. The final payment of the principal balance at the end of the term is referred to as a balloon payment.
Alienation Clause (aka Due-on-Sale Clause)
A clause in a contract giving the lender certain rights in the event of a sale or other transfer of a mortgaged property. Provides protection to the lender and prevents the borrower from assigning the loan’s debt to another person without the lender’s prior approval (i.e., when home is sold, loan is paid in full; new home buyer will need to obtain their own loan).
Assignment
The transfer to another of any property in possession or in action, or of any estate or right therein. A transfer by a person of that person’s rights under a contract, but not the title.
EX: all of the interest in the original loan being transferred to another bank - it is very common for banks to “sell” mortgages in order to free up assets
Assignment of Rents
A provision in a mortgage or deed of trust under which the lender may, upon default by the trustor, take possession of the property, collect income from the property’s tenants, and apply it to the loan balance and the costs incurred by the lender.
Assumption of Mortgage
The taking of a title to property by a grantee wherein the grantee assumes liability for payment of an existing note secured by a mortgage or deed of trust against a property, becoming a co-guarantor for the payment of a mortgage or deed of trust note.
- -lender is given this right, borrower is not
- -buyer takes over the mortgage loan, with the lender’s permission, and takes primary responsibility for it from that time forward. The seller may also retain a secondary liability unless the lender agrees to a novation (transfer of the responsibility of the loan to the buyer)
Default
Failure to fulfill a duty or promise or to discharge an obligation.
EX: failure to make on-time home loan payments
Defeasance Clause
The clause in a mortgage that gives the mortgagor the right to redeem the mortgagor’s property upon the payment of the mortgagor’s obligations to the mortgagee. States that the borrower is given full title to the property once they’ve satisfied all terms of the mortgage and repaid the loan.
Hypothecate
To pledge a thing (real estate) as security (collateral) without the necessity of giving up possession of it.
Mortgage
A legal instrument recognized by law by which property is hypothecated (i.e., pledged) to secure the payment of a debt or obligation.
- -piece of paper that home buyer signs and gives to his/her lender, creating a lien on the home
- -outlines the amount of money borrowed, interest rate, and other details such as the right of the lender to take possession of their property upon default and the obligation to pay property taxes and insurance
Mortgagee
One to whom a mortgagor gives a mortgage to secure a loan or performance of an obligation; a lender or creditor. They do not hold title of the home, but can utilize the mortgage to obtain ownership should a default occur.
–Right to foreclose, take possession of the property after foreclosure, and assign the mortgage (generally done in the secondary market)
Mortgagor
One who gives a mortgage on his or her property to secure a loan or assure performance of an obligation; a borrower.
–Responsible for payment of debt, home insurance, and real estate taxes; maintaining the property’s value; and obtaining permission from the lender before making significant change to the property (i.e., home additions or significant renovations)
Satisfaction of Mortgage (Release of Mortgage)
The discharge of a mortgage from the public records upon payment of the debt. Once the legal recording of the transaction is public (lender’s responsibility to file mortgage with the county’s clerk), the borrower owns the property free and clear of any loan.
