Chapter 5 - Real Estate Finance

Which of the following fixed amortization terms will have the lowest interest rate...?

10 year fixed

What is a typical margin found in an adjustable rate mortgage...?

2.75%

Interest Rate % =

5 year treasuries % + bank's margin %

Release Clause

A clause found in a blanket mortgage which gives the owner of the property the privilege of paying off a portion of the mortgage indebtedness, and thus freeing a portion of the property from the mortgage.

Prepayment Penalty Clause

A clause in a mortgage contract that says if the mortgage is prepaid within a certain time period, a penalty will be assessed. The penalty is usually based on percentage of the remaining mortgage balance or a certain number of months worth of interest.

Real Estate Settlement Procedures Act (RESPA)

A consumer protection statute, first passed in 1974. The purpose of RESPA are 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.

Satisfaction of Mortgage

A document acknowledging the payment of a mortgage debt.

Loan To Value Ratio (LTV)

A financial term used by lenders to express the ratio of a loan to the value of an asset (property) purchased.

Reverse Annuity Mortgage

A form of mortgage in which the lender makes periodic payments to the borrower using the borrower's equity in the home as satisfaction of mortgage.

Discount Points

A form of pre-paid interest where one point equals one percent of the loan amount.

Wrap-around Mortgage

A form of secondary financing for the purchase of real property. 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.

Home Equity Line Of Credit (HELOC)

A line of credit extended to a homeowner that uses the borrower's home as collateral.

Point

A loan fee equal to one percent of the mortgage amount.

Home Equity Loan

A loan secured by equity value in the borrower's property.

Construction Mortgage

A loan secured by real estate which is for the purpose of funding the construction of improvements or building(s) upon the property.

Conventional Mortgage

A loan secured by real property through the use of a mortgage note.

Package Mortgage

A method of financing in which the loan that finances the purchase of a home also finances the purchase of personal items such as a washer and dryer, refrigerators, stove, and other specified appliances.

VA Mortgage

A mortgage loan designed to offer long-term financing to eligible American veteran or their surviving spouses (provided they do not remarry). The basic intention of the VA direct home loan program is to supply home financing to eligible veterans in areas where private financing is not generally available and to help veterans purchase properties with no down payment.

Adjustable Rate Mortgage (ARM)

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.

State of New York Mortgage Association (SONYMA)

A mortgage program that assists first-time homebuyers with the purchase of a home in New York State.

Balloon Mortgage

A mortgage which does not amortize over the term of the note, thus leaving a balance due at maturity.

Pledged Account Mortgage

A mortgage with a dedicated savings account, which earns interest, that is used to gradually reduce mortgage payments.

Straight Mortgage

A non-amortizing mortgage under which the principal is paid in its entirety upon the maturity date.

Straight Mortgage/Term Mortgage

A non-amortizing mortgage under which the principal is paid in its entirety upon the maturity date. Only interest is paid over the period of the mortgage, and then the principal is due at the end, along with the final interest payment.

Promissory Note

A signed document containing a written promise to pay a stated sum to a specified person/institution or the bearer at a specified date or on demand.

Promissory Note

A signed document containing a written promise to pay a stated sum to a specified person/institution or the bearer at a specified date or on demand. - Promise to Pay

Acceleration Clause

A term given to the practice of paying off a mortgage loan faster than required by terms of the mortgage agreement.

Grace Period

A time past the deadline for an obligation during which a late penalty that would have been imposed is waived.

Sale-and-Leaseback

A transaction where one sells an asset and leases it back for the long-term; therefore, one continues to be able to use the asset but no longer owns it.

Graduated Payment Mortgage

A type of fixed-rate mortgage in which the payment increases gradually from an initial low base level to a desired, final level.

Blanket Mortgage

A type of loan used to fund the purchase of more than one piece of real property. A blanket mortgage is often used for subdivision financing.

Bridge Loan

A type of short-term loan, typically taken out for a period of 2 weeks to 3 years.

"Due on Sale" Clause

Allows lender to require the balance of a loan to be paid in full if the collateral is sold (also known as an Alienation Clause).

Alienation Clause

Allows the lender to require the balance of a loan to be paid in full if the collateral is sold (also known as a "due on sale" clause).

FHA Mortgage

Backed loans that usually require a lower down payment and may sometimes have a lower interest rate.

Credit, Income, and Assets

Banks use the following to determine if a borrower is qualified to obtain a mortgage.

Types of Mortgage Loans

Conventional: Fannie Mae Freddie Mac Conventional Conforming up to $417,500 High Balance/High Cost $417,500 - 625,500 Jumbo Loan over $625,000 Government: FHA VA Suny Mae

Robert is reviewing the mortgage documents he received from the bank. What is a typical clause Robert will most likely encounter when reviewing the mortgage...?

Defeasance clause

An FHA mortgage is insured by the government while a VA mortgage is guaranteed by the government

Difference between an FHA mortgage and a VA mortgage.

Lower Period of Mortgage

Highest Monthly Payment, Lower Interest Rate

Private Mortgage Insurance (PMI)

Insurance payable to a lender or trustee for a pool of securities that may be required when taking out a mortgage loan.

Shared Equity Mortgage

Joint ownership of real estate by both lenders and property dwellers. When the property is eventually sold, the owners share in the proceeds, or equity. In the meantime the property occupants benefit from interest and property tax write-offs.

Mortgage

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. - A Lien. - Gets recorded

Loan Amount =

Lesser of Home Value, Contract Price, and Appraised Value = $ Multiplied by the Loan to Value Ratio = % Loan = $*%

625,500

Loans greater than this amount are considered jumbo loans.

A lender typically uses this valuation method when determining the value of a property...?

Market approach

Defaulting on his mortgage

Michael has a mortgage on his single family home. However, he is having difficulty making payments and is nearly 3 months late on his mortgage. What is Michael in danger of doing...?

Pledged Account Mortgage (PAM)

Money is placed in a pledged savings account. This fund, plus earned interest, is used to gradually reduce mortgage payments.

Buydown

Obtaining a lower interest rate by paying additional points to the lender.

Negative Amortization

Occurs whenever the loan payment for any period is less than the interest charged over that period so that the outstanding balance of the loan increases.

Usury

On a loan, claiming a rate of interest greater than that permitted by law.

Properties within a 1 mile radius, sold within the past 6 months

Parameters appraisers typically use to determine the value of a property using the sales comparison approach.

The limit to the monthly payment on a mortgage is known as what...?

Payment Cap

PITI (Principal, Interest, Taxes, Insurance)

Principal, interest, taxes, insurance = the formula for calculating a mortgage payment Mortgage payments include the following: Common charges (co-op) Mortgage insurance Flood Insurance Second Mortgage

Buydown

Reducing the interest rate on his mortgage by paying additional points to the lender upfront.

Interest and Tax Deductibility

Reductions of the income subject to tax, for various items, especially expenses incurred to produce income.

Lifetime Cap/Ceiling

Some mortgages have interest rate ceilings (or limits) which are similar to, and sometimes referred to as, lifetime caps.

Acceleration clause

Term given to the practice of paying off a mortgage loan faster than required by terms of the mortgage agreement.

Regulation Z

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.

Margin

The amount of interest a bank charges on a loan over the base rate

Margin

The amount of interest a bank charges on a loan over the base rate.

Mortgage Insurance Premium (MIP)

The amount paid by a mortgagor for mortgage insurance, either to a government agency such as the FHA or to a private mortgage insurance (MI) company.

Property condition, Marketable title, and Sales comparables

The banks review these trying to determine if a property is worth lending on.

Mortgagor

The borrower, typically a home owner.

Default

The failure to pay back a loan.

Pay the mortgage, Keep the property in good condition, and Keep title 'as-is'

The following is the borrower's obligation to the bank when taking out a mortgage on a property.

Start rate, Annual cap, and Lifetime cap

The following should be considered when trying to determine if an adjustable rate mortgage is a viable option.

Mortgagee

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

Primary Mortgage Market

The market where borrowers and mortgage originators come together to negotiate terms and effectuate mortgage transaction. Mortgage brokers, mortgage bankers, credit unions and banks are all part of the primary mortgage market.

Secondary Mortgage Market

The market where mortgage loans and servicing rights are bought and sold between mortgage originators, mortgage aggregators (securitizers) and investors. The secondary mortgage market is extremely large and liquid.

Secondary Mortgage Market

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

Assignment

The method or manner by which a right or contract is transferred from one person to another.

Capitalization Rate

The percentage which is the sum of the discount rate, the effective tax rate and the recapture rate representing the relationship between net operating income and present value. Formula: Value = Income / Rate

Amortization

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

Inflation

The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.

Red-Lining

The refusal to lend money within a specific area for various reasons. This practice is illegal.

Predatory Lending

The unfair, deceptive, or fraudulent practices of some lenders during the loan origination process.

Real Estate Settlement Procedures Act (RESPA)

This Act helped consumers become better shoppers for settlement services.

Alienation

This clause allows a lender to require the balance of a loan to be paid in full if the collateral is sold.

Bridge

This type of loan is an example of a short-term loan.

VA Mortgage

This type of mortgage is generally used to help veterans purchase properties with no down payment.

Acceleration, Alienation, and Defeasance

Typical clauses in most mortgages.

The 1st of the month

Typical due date for most mortgage payments.

Which of the following clauses will a mortgagor typically NOT encounter in his/her mortgage documents...?

Warranty clause Typical clauses: Acceleration clause Alienation clause Defeasance clause

Who is required to sign the mortgage...?

the persons on the deed