Unit 15 - part 3 Flashcards
Financing Techniques
- Package Loan
- Blanket Loan
- Wraparound Loan
- Open-End Loan
- Construction Loan
- Sale-and-Leaseback
- Buydown
- Home Equity Loan
Package Loan
A package loan includes real and personal property.
In recent years, these kinds of loans have been very popular with developers and purchasers of unfurnished condominiums.
Package loans usually include furniture, drapes, the kitchen range, microwave oven, refrigerator, dishwasher, washer, dryer, and other appliances as part of the sales price of the home.
Blanket Loan
A blanket loan covers more than one parcel or lot. It is usually used by a developer to finance a subdivision.
A blanket loan usually includes a provision known as a partial release clause. This clause permits the borrower to obtain the release of any one lot or parcel from the blanket lien by repaying a certain amount of the loan. The development lender issues a partial release from the mortgage lien on the entire property for each parcel sold.
Wraparound Loan
A wraparound loan enables a borrower with an existing mortgage loan to obtain additional financing from a second lender without paying off the first loan.
The second lender gives the borrower a new, increased loan at a higher interest rate and assumes payment of the existing loan.
The total amount of the new loan includes the existing loan as well as the additional funds needed by the borrower. The borrower makes payments to the new lender on the larger loan. The new lender makes payments on the original loan out of the borrower’s payments.
Open-End Loan
Open-end credit is a preapproved loan between a financial institution and borrower that may be used repeatedly up to a certain limit.
The interest rate on the initial amount borrowed is fixed, but interest on future advances may be charged at the market rate in effect at that time.
An open-end loan is often a less costly alternative to a home improvement loan.
Construction Loan
A construction loan is made to finance the construction of improvements on real estate such as homes, apartments, and office buildings.
Construction loans are generally short-term or interim financing. The borrower pays interest only on the monies that have actually been disbursed. The borrower is expected to arrange for a permanent loan, also known as an end loan or take- out loan, which will pay off (take out) the construction financing lender when the work is completed by paying the principal owed on the construction loan.
Sale-and-Leaseback
Sale-and-leaseback arrangements, while not loans, are used to finance large commercial or industrial properties.
The land and the building, usually used by the seller for business purposes, are sold to an investor. The real estate then is leased back by the investor to the seller, who continues to conduct business on the property as a tenant. The buyer becomes the landlord, and the original owner becomes the tenant.
This enables a business to free money tied up in real estate to be used as working capital.
Buydown
A buydown is a way to temporarily (or permanently) lower the interest rate on a mortgage or deed of trust loan.
The payment offsets (and so reduces) the interest rate and monthly payments during the mortgage’s first few years. Typical buydown arrangements reduce the interest rate by I% to 2% over the first one to two years of the loan term. After that, the rate rises.
In a permanent buydown, a larger up-front payment reduces the effective interest rate for the life of the loan.
Home Equity Loan
Home Equity Line of Credit (HELOC)
A home equity loan is a source of funds that takes advantage of the equity built up in a home.
The home equity loan is junior to the original lien.
Although the home equity line of credit will carry a higher interest rate than a purchase loan, it is an alternative to refinancing because only the amount borrowed will be subject to the higher rate.
The interest paid on a home equity loan of up to $100,000 is deductible from federal income tax.
A home equity loan can be taken out as a fixed loan amount or as a line of credit. With the home equity line of credit, called a HELOC, the lender extends a line of credit that the borrower can use at will.
Regulation Z
Requires that credit institutions inform borrowers of the true cost of obtaining credit.
Regardless of the amount, Regulation Z generally applies when a credit transaction is secured by a residence. The regulation does not apply to business or commercial loans or to agricultural loans of any amount.
Three-Business-Day Right of Rescission
In the case of most consumer credit transactions covered by Regulation Z, the borrower has three business days in which to rescind (cancel) the transaction by notifying the lender.
This right of rescission does not apply to owner-occupied residential purchase-money or first mortgage or deed of trust loans. It does, however, apply to refinancing a home mortgage or to a home equity loan.
Equal Credit Opportunity Act (ECOA)
prohibits discrimination in the lending process based on the credit applicant’s race, color, religion, national origin, sex, marital status, age (provided the applicant is of legal age), or receipt of public assistance.
The ECOA requires that credit applications be considered only on the basis of income, the stability of the source of that income, net worth (total assets and liabilities) , and credit rating.
The protections offered by ECOA are both similar (race, color, religion, and national origin) and different from tho se of the Fair Housing Act ; ECOA includes age, marital status, and receipt of public assistance.
