Unit 14 - part 1

Question 1

Ownership Expenses

Answer 1

PITI

• principal
• interest
• taxes
• insurance

Question 2

equity

Answer 2

The difference between the market value of the property and the amount still owed.

Question 3

promissory note

Answer 3

The promissory note (note or financing instrument) is a borrower’s personal promise to repay a debt according to the agreed terms.

The note generally states the amount of the debt, the time and method of payment, and the rate of interest.

A note is a negotiable instrument. This means that, without changing the provisions of the contract, the note may be sold to a third party, such as an investor or another mortgage company.

Question 4

Interest

Answer 4

Interest is a charge for the use of money, expressed as a percentage of the remaining balance of the loan.

Question 5

usury

Answer 5

Charging interest in excess of the maximum rate allowed by law is called usury.

To protect consumers from unscrupulous lenders, many states have enacted laws limiting the interest rate that may be charged on loans.

Question 6

loan origination fee (transfer fee)

Answer 6

The processing of a mortgage application is known as loan origination. When a home loan is originated, a loan origination fee, or transfer fee, is charged by most lenders to cover the expenses involved in generating the loan.

The loan origination fee will vary, but typically is about 1% of the loan amount.

Question 7

Discount points

Answer 7

Discount points are used to increase the lender’s yield (rate of return) on its investment.

Discount points are a type of prepaid interest or fees mortgage borrowers can purchase that lowers the amount of interest they will have to pay on subsequent payments. Each discount point generally costs 1% of the total loan amount and depending on the borrower, each point lowers your interest rate by one-eighth to one one-quarter of your interest rate. Discount points are tax deductible only for the year in which they were paid.

Points, sometimes also called “discount points”, are a form of pre-paid interest. One point equals one percent of the loan amount. By charging a borrower points, a lender effectively increases the yield on the loan above the amount of the stated interest rate.

Question 8

prepayment penalty

Answer 8

If the borrower repays the loan before the end of the term, the lender collects less than the anticipated interest.

For this reason, some mortgage notes contain a prepayment clause. This clause requires that the borrower pay a prepayment penalty against the unearned portion of the interest for any payments made ahead of schedule.

Question 9

Hypothecation

Answer 9

In mortgage lending practice, a borrower is required to make specific real property security (collateral) for the loan. In the process called hypothecation, the debtor retains the right of possession and control of the secured property, while the creditor receives an equitable right in the property. The right to foreclose on the property in the event a borrower defaults is contained in the security agreement, which takes the form of either a mortgage or a deed of trust.

• debtor retains the right of possession & control of the property
• creditor receives equitable right in the property, not ownership
• creditor can foreclose only if borrower defaults

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