Lesson 5 - Real Estate Finance

Question 1

Mortgage

Answer 1

-Legal agreement by which a bank lends money in exchange for taking title of the debtor’s property, with the condition that the conveyance of title becomes void upon payment of the debt.

Question 2

APR

Answer 2

-The actual interest rate charged, including loan fees and points.

Question 3

Secondary Mortgage Market

Answer 3

-The market where mortgage loans and servicing rights are bought and sold between mortgage originators, mortgage aggregators (securitizers) and investors.

Question 4

Loan-To-Value (LTV)

Answer 4

• A financial term used by lenders to express the ratio of a loan to the value of an asset (property) purchased.
• Determined by using the Purchase Price or the Appraised Value, whichever is less.

Question 5

Satisfaction of Mortgage

Answer 5

-A document acknowledging the payment of a mortgage debt.

Question 6

Adjustable Rate Mortgage (ARM)

Answer 6

• A mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets.
• Considered high risk

Question 7

Fixed Rate Mortgage

Answer 7

-Accounts for the majority of mortgages.

Question 8

Amortization

Answer 8

-The process by which a loan principal decreases over the life of a loan.

Question 9

Mortgagor

Answer 9

-The borrower (person buying the house)

Question 10

Mortgagee

Answer 10

-The lender or bank who provides a loan to the borrower or homeowner

Question 11

Straight Loan

Answer 11

-This is an interest-only loan. The balance of the loan always remains the same. At the end of the term of the loan, the borrower must pay the full balance back.

Question 12

Blank mortgage

Answer 12

-A blanket mortgage is a type of commercial mortgage in which two or more parcels of real estate are pledged as security for payment of the mortgage debt.
A blanket mortgage usually contains a release clause, which allows certain parcels of property to be removed from the mortgage lien when the loan balance is reduced by a certain amount.

Question 13

Purchase Money Mortgage

Answer 13

-A purchase money mortgage is a type of seller financing in which a mortgage is given by the buyer to the seller to cover part of the purchase price.
In this type of loan, the seller becomes the mortgagee and the buyer becomes the mortgagor.

Question 14

Wraparound Mortgage

Answer 14

-A wraparound mortgage is another type of seller financing. The seller extends to the buyer a junior mortgage, which wraps around the existing in addition to any superior mortgages already secured by the property.

Question 15

Swing/Bridge Loan

Answer 15

• A type of short-term loan, typically taken out for a period of 2 weeks to 3 years.
• A bridge loan is a type of gap mortgage in which funds are provided over and above an already existing loan until more permanent financing is in place.
• A bridge loan allows a buyer to obtain a new property without having to sell his/her current property.

Question 16

Construction Mortgage

Answer 16

-A construction mortgage is a form of interim, or temporary, short-term financing for creating improvements or buildings on a property.

Question 17

Graduated Payment Mortgage (GPM)

Answer 17

-In a graduated payment mortgage, the monthly payments are lower in the early years of the mortgage term, but increase at specific intervals until the payment amount is sufficient to amortize the loan over the remaining term.
The monthly payments are low in the early years because the borrower does not pay all of the interest that is then added to the principal balance.

Question 18

Conventional Loan

Answer 18

• Conventional loans are loans issued by commercial lenders without any participation by an agency of the federal government.
• Conventional loans with an loan-to-value ratio greater than 80% need to obtain private mortgage insurance (PMI).

Question 19

Government Loans

Answer 19

-Government loans involve some kind of participation by a government agency.
The most common type of government loan is an FHA-insured loan.
Mortgage insurance premium (MIP) is paid upfront when obtaining an FHA-insured loan.

-VA-guaranteed loans are another example of government loans. These loans are offered to Veterans.

Question 20

Pre-payment Penalty Clause

Answer 20

-A pre-payment penalty clause states that the borrower cannot pay off the loan at any time before expiration of the full mortgage term without a financial penalty for early payoff.

Question 21

Real Estate Settlement Procedures Act (RESPA)

Answer 21

-A consumer protection statute, first passed in 1974. Also known as Regulation X.
The purpose of RESPA is:

1) To help consumers become better shoppers for settlement services and
2) To eliminate kickbacks and referral fees that unnecessarily increase the costs of certain settlement services.

Question 22

Truth in Lending ACT (TILA)/Regulation Z

Answer 22

-The Truth in Lending Act of 1968 is United States federal law designated to promote the informed use of consumer credit, by requiring disclosures about its terms and cost to standardize the manner in which costs associated with borrowing are calculated and disclosed.

Question 23

4 main disclosures of TILA

Answer 23

1) Annual percentage rate
2) Finance charge
3) Amount financed
4) Total amount of money to be paid toward the mortgage in principal and interest payments

Question 24

Points

Answer 24

• 1 point equals 1% of the loan amount.

- If a lender charges 1-1/2 points as a loan origination fee, the fee will equal 1.5% of the loan amount.

Question 25

Buydown

Answer 25

A buydown allows the borrower to obtain a lower interest rate by paying additional points upfront to the lender.

A buydown may also be referred to as discount points.

Question 26

Usury Laws

Answer 26

-Usury laws govern the amount of interest that can be charged on a loan.