Chapter 8 P RE Real Estate Finance

Alienation Clause

'due on sale' clause in DEED OF TRUST stating that full balance of loan due upon sale, transfer, assigned or otherwise alienated financial institution or private party given the right to full payment when borrower transfers property - enforceable and benefits the lender A form of acceleration clause

Discount Points

1 point + 1% of the loan amount Fees paid to decrease the mortgage rate when buying or refinancing a house. example: 300,000 loan + 2 points = 300,000 x .02 = 6000

3 basic kinds of Promissory Notes

1. Straight Note - principal is a one lump sum payment, at maturity while interest paid in installments 2. Partially Amortized Note - installment note w/a balloon Payment, promissory note with periodic payments and a large payment at the end (maturity or due date) 3. Fully amortized note - promissory note for which both the principal and interest are paid in equal installments until the debt is paid in full

Reinstatement period

3 months after "notice of default" is filed where the truster may reinstate the loan All past due payments penalties taxes and interest

Subordination Clause

A clause in which the holder of a trust deed permits a subsequent loan to take priority The clause in a loan that allows buyer to alter the priority of a loan.

Amortization Schedule

A table that shows how much of each loan payment is needed to amortize a loan over a given number of years at different rates for different loan amounts

Graduated Payment Mortgage

A type of mortgage where payments start out lower in the early years and increase later ie loan starts low and after 5 years the payments will be higher

Land Contract

Agreement under which buyer pays in installments and waits for Deed Buyer has Equitable Title the seller retains the title; with a purchase money mortgage, the buyer retains the title.

Index

An index is a published interest rate based on the returns of investments such as U.S. Treasury securities starting interest rate used as the indicator that changes from it can be calculated If index goes up 1% the ARM goes up 1% must be 1. beyond control of lender 2. avail and verifiable by the public index examples: Cost of living index, 11th district cost of funds, one year t bill, and the london interbank offered rate

A.P.R.

Annual Percentage Rate is the annual rate charged for borrowing or earned through an investment, and is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan. The total cost of financing expressed as one simple annual percentage rate. This rate must be clearly expressed on any loan agreement

Legal Title

Bare or Naked legal title Held by trustee until the terms of a trust deed and note have been fulfilled - when truster has paid note in full - trustee will reconvey the naked legal title

Trustor

Borrower under a deed of trust one who deeds property to a trustee to hold in security of obligation

Assumption

Buyer ASSUMES loan on property already encumbered and takes responsibility w/lenders consent for full payment name on loan changed to buyer - the seller has secondary responsibility to file SUBSTITUTION OF LIABILITY FORM SUBJECT TO loan takeover

Default on a Trust Deed

By law the lender can start a default action after 10-15 day grace period. Grace Period is a set number of days in which the lender will allow a payment to be late w/o penalty. The lender, after grace, may start default action

Assignment of Rents

Clause allows that allows lender's right to take possession and collect rents and pay expenses in the event of a loan default

Prepayment Penalties

Clause for an Additional charge one may owe if they decide to pay off their loan before the due date Only enforceable during the first 5 years of a 1-4 unit home loan

Promotional Note

Common in adjustable rate mortgages a Short -term note up to and including a term of 36 months

Reverse Mortgage Loan

Enables older homeowners (62+) to convert home equity into income without requiring borrower to move. sold at the time the owner dies

Trustee's Sale

Foreclosure sale nonjudicial foreclosure under the "power of sale" clause in the deed of trust and promissory note

Trust Deed

Held by a 3rd party (Trustee) until obligation is pd by Borrower (Trustor) to the lender (beneficiary)

Straight Note

Interest only payments, with entire principal due in a lump sum at maturity date

Fixed Interest Rates

Interest rates that stay the same amount each month for the life of the loan or account. Fully Amortized Fixed Rate Loan

Short Sale

Lender agrees to accept sale proceeds, even if less than the debt proceeds of the sale are less than balance owed on the mortgage

Mortgage v Trust Deed

Lender has fewer restrictions 1. short period to reinstate prior to the sale, fact the the sale once made is usually absolute 2.ease of not having to resort to court action if property needs to be sold to satisfy the debt

Seasonal Note

Longer than 36 months

Publishing period

Notice of default must be published in a newspaper of general circulation once a week for 3 weeks

Trust Deed v Mortgage

One Major difference in favor of owner is the right of redemption Mortgage = 1 year to redeem following a court foreclosure = EQUITY OF REDEMPTION TRUST DEED = NO right of redemption

Amortization

Payment of debt in regular periodic installments of principal and interest, as opposed to interest only payments

Remedy for Default

Payment of late payments, taxes, expenses Redemption period

Truth in Lending law

Regulation Z enacted to protect the consumer by requiring that the lender (creditor)tell the borrower how much he is paying for the credit

Effective Interest Rate

The actual rate of interest paid by the borrower or earned by the lender including interest, points, loan fees interest = Principal x Rate X Time

Purchase Money Instrument

The original loan taken out when purchasing a property , not a refinanced or junior loan

Junior Loan

Trust Deed

Adjustable Rate Mortgage

Trust Deed, whose rate of interest is adjusted periodically (fluctuates) to reflect market conditions causing the monthly payment to also raise

Deed of Reconveyance

When a trust deed note is paid, trustee records deed of reconveyance to remove the lien from public record Proof of payment in full

Power of Sale

a clause in a deed of trust allowing non-judicial foreclosure Authorizes holder of note/title to sell property at auction without judicial foreclosure

Biweekly Mortgage

a loan on which payments equal to half the regular monthly payment are made every 2 weeks

Promissory Notes

a promise in writing to pay a specific amount during a limited time, or on demand, to a named person a negotiable instrument that can be passed easily from one person to another most common example is a personal check

Wrap-around trust deed

a second trust deed for which the monthly payment includes the amount of monthly payment on the existing first trust deed

Mortgages

a specific type of loan that is used to buy real estate NOT common in California financial instrument in the form of a lien securing property for payment of a promissory note

Negotiable Instrument

any financial document that can be easily transferred (promissory note or check) it must be: 1. Unconditional promise 2. in writing 3. made by one person to another 4. signed by the maker 5. payable on demand or on a set date 6 for a set amount of money

Deed in Lieu

borrower signs over the deed to the lender to prevent foreclosure

Acceleration Clause

clause in the DEED OF TRUST that allows the lender to demand immediate payment of the entire loan if the borrower defaults

Security Devices

financial instruments, written documents that pledge real property as security for a promissory note. 3 common in CAL 1. Mortgages (rare 2. Trust Deeds (1st and 2nd) 3. Land contracts

15-Year Fixed loan

fixed rate loan that can, for a slight increase, be paid of in only 15 years instead of 30

Adjustable Interval

frequency with which interest rates are reset, monthly quarterly every 6 months or even one year If the index has risen 3%at the end of interval period, the interest rate goes up 3%

Loan Fees

general term for fees that affect the cost of borrowing to the borrower from the lender

Equitable Title

held by trustor while he is repaying a trust deed and note. Land contract - Vendee It is true ownership, trustor (borrower) may enjoy all rights of title and possession

Holder in Due Course

holder who takes a negotiable instrument for value in good faith, without notice that the instrument is defective Buyer of existing promissory note

Trustee

in a deed of trust, the person who acts as an intermediary btw the truster and the beneficiary one who holds property in trust for another to secure the performance of an obligation

Fully amortized note

installment note promissory note for which both the principal and interest are paid in equal installments until the debt is paid in full except final payment which may be higher or lower

Partially Amortized Note

installment note w/a balloon Payment, promissory note with periodic payments and a large payment at the end (maturity or due date)

Simple Interest

interest paid based only on the principal amount owed

Negative Amortization

interest rate charges are higher than the monthly payment Means the amount of the home equity is deceasing instead of increasing.

Principal

is the dollar amount of the loan amount of money originally borrowed in a loan

Interest

is the rent charged for the use of money A sum paid or charged for the use of money or for borrowing money

Redemption Period

legal time period in which a foreclosed owner can buy back (regain) property mortgage = 1 year trust deed = short period of time 4 months

Loan Payment

note made up of principal and interest jot be paid off on a promissory note

Right to Cancel

part of truth in lending law, allows borrower to rescind a loan transaction until midnight of the 3rd business day - secured by a borrowers residence

The Cap

percentage rate ceiling or restriction on loan 1. periodic interval (adjustable) limits change up or down (caps) to 1/2% every quarter (or term) 2. lifetime change in interest rates or payments - cap often max of 5% up/down initial agreed to contract rate

Principle of Leverage

practice of purchasing real estate using a small amount of your own funds and a larger portion of borrowed funds The more money borrowed the more leverage

Amortization Payments

repayment of loan - principal and interest - in regular payments (monthly, quarterly, or semi annually) over the term of the loan

Impound Accounts

reserves - moneys collected in advance from borrowers to assure payment of recurring costs, such as property taxes and fire insurance lenders sometime require when down payment low

The Margin

spread btween the index rate and the initial contract rate from which the lender will make a profit and cover its costs the margin percentage remains the same. it is agreed to in advance, the number of percentage points, an amount to cover cost and to make a profit for the lender. If index rate 4% and margin is 3% interest rate paid by homeowner is 7% - if it moves up to 5% the interest rate will increase to 8% the margin always remaining at 3%

Usury

the illegal action or practice of lending money at unreasonably high rates of interest. Almost all lenders exempt except a private individual lending to a private individual

Nominal Interest Rate

the stated interest rate on a loan

Hypothocation

to provide title to a property as security for a loan w/o giving up possession. hypothecate = pledge most real property buyers hypothecate their property as security for a bank loan trust deed in cal uses promissory note as primary evidence of debt which creates a lien on the property

Promissory Note

written unconditional promise by one person to another to pay in demand, or over a fixed determinable time, a certain sum of money. borrowers hypothecate real property as for payment of the promissory note