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Real Estate > Chapter 14 - Types of Financing > Flashcards

Chapter 14 - Types of Financing Flashcards

1
Q

Variable Rate Mortgage

A

Interest rate could be adjusted by lender during the 30 year life of the loan to reflect the rise and fall of interest rates paid to savers and lenders

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2
Q

Adjustable Rate Mortgage (ARM)

A

A mortgage on which interest rate rises and falls with changes in prevailing interest rates

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3
Q

ARM Main Requirement

A

Interest rate must be tied to some publicly available index that is acceptable by both borrower and lender.

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4
Q

ARM Benefit to Borrower

A
  • ARMs carry an initial interest rate that is lower than the rate on a fixed rate mortgage
  • If market interest rates fall, borrowers monthly payment will fall
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5
Q

ARM Disadvantage to Borrower

A

If market rates rise, borrower will pay more

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6
Q

Index Rate

A

Most popular is the one year maturity treasury - Published by Federal Reserve based on daily calculations

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7
Q

Margin

A

The amount added to the index rate that reflects the lenders cost of doing business
- 2-3%
- Stays constant

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8
Q

Adjustment Period

A

Amount of time the elapses between adjustments - Commonly one year
- When rates are rising, longer adjustment periods benefit the borrower

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9
Q

Interest Rate Cap

A
  • Lenders are required to disclose
  • How much the interest rate can increase for any one adjustment period
  • Most popular is 1-2%
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10
Q

Payment Cap

A

Sets limit on how much the borrower’s monthly payment can increase in any one year
- Most popular is 7.5%

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11
Q

Negative Amortization

A

Accrual of interest on a loan balance so that, as loan payments are made, the loan balance rises
- Set limit of 125% of original loan balance

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12
Q

Graduated Payment Mortgage

A

Mortgage with and interest rate and maturity that are fixed, but the monthly payments gradually rise, because the initial monthly payments are insufficient to fully amortize the loan
- Common during periods of high inflation

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13
Q

Equity Sharing

A

An arrangement whereby a party providing financing gets a portion of owners profits

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14
Q

Shared Appreciation Mortgage (SAM)

A
  • Offers interest rates of 1-2% below market value
  • Lender earns about half the increase in appreciation over the term of the loan
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15
Q

Package Mortgage

A

A mortgage that secures personal AND real property
- Borrower can finance major appliances at the same rate as the real estate

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16
Q

Blanket Mortgage

A

A mortgage secured by 2 or more properties

17
Q

Reverse Mortgage

A
  • Must be 62 to qualify.
    Payments made to home owner by lender either in one lump sum (Reverse Annuity Mortgage - RAM) or in monthly payments
    Lender is repaid after home owner dies or property is sold
18
Q

Construction Loan - aka Interim Loan

A

Short term loan for new construction or remodeling of an existing structure

19
Q

Blended-Rate Loan

A

A refinancing plan that combines the interest rate on exiting mortgage loan with current rates

20
Q

Equity Mortgage

A
  • Lender agrees to make a loan based on the amount of equity in a borrowers home
  • Max loan is 70-80% of homes value minus any first mortgage or other liens against the property
21
Q

Affordable Housing Loan

A
  • Low income = No more than 80% of median income for area
  • Moderate income = No more than 115% of median income for area
22
Q

Seller Financing

A

A note accepted by a seller instead of cash

23
Q

Wraparound Mortgage

A

A mortgage that encompasses any existing mortgages and its subordinate to them

24
Q

Subordination

A

Voluntary acceptance of a lower mortgage priority than one would other wise be entitled to

25
Q

Option

A

A right for a given period of time to by, sell or lease the property at a specified price and terms

26
Q

The purpose of an ARM is to more closely match what the lender received in interest to

A

The yield available from other types of investments

27
Q

A borrower is considering an ARM mortgage from the first lender at a 2% margin and a comparable loan from a second lender at a 3% margin. The loan from the first lender would result in

A

Lower loan payments

28
Q

ARM mortgages with teaser rates are avoided by mortgage insurers because

A

They can lead to early foreclosure when the rates are increased

29
Q

Jeff has a blanket mortgage, can he sell one of the properties?

A

If the mortgage contained a partial release clause, it would be possible to sell a property before the entire mortgage debt was repaid.

30
Q

A woman is building a new home and has secured a construction loan from her local bank. When the house is finished, she plans to pay off the construction loan with a permanent loan from a savings and loan association. Will the permanent loan be a take-out loan?

A

Yes. A take-out loan is secured from another lender to pay off a construction loan. Construction loans are considered high risk and usually cost a higher interest rate than the less risky permanent loan

31
Q

A corporation build a building to its exact specifications. It wants to pull out its capital to use for other purposes. The best financing option is the

A

Sale and leaseback. The owner occupant sells his property in a sale leaseback and then remains as the tenant

32
Q

A couple own their home which is presently worth approximately $150,000. They have an existing fixed rate mortgage of $50,000 on their property. To help pay for their child’s college expenses, they have arranged for an equity loan on the home. How is the interests rate determined?

A

The interest rate will probably be based on the prime rate plus the lender’s margin of 1-3%

33
Q

When would a wraparound mortgage be discouraged?

A

Wraparound mortgages cannot be used if there is a due-on-sale clause.

34
Q

A sale may be made and financed under a contract for deed

A

By combining wraparound financing with an existing mortgage on the property, provided the existing mortgage does not contain a due-on-sale clause. It is not necessary for the property to be owned free and clear. Contract for deed may be used on any property type and the seller can approve the buyer without following any guidelines

35
Q

Possession without the need to immediately finance the full purchase price of a property can be achieved by using a

A

Lease with option to buy. This eliminates the need for immediate financing of the full purchase price of the property.

36
Q

A graduated payment mortgage is appealing to which group of buyers?

A

Young professionals. They are more likely to see increases in their incomes so that they can more easily afford the increasing payment

37
Q

One major disadvantage to the borrower of an ARM is

A

Possible negative amortization

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