chapter 18

Release Clause

A clause often found in a blanket loan allowing the borrower to obtain partial releases of specific lots by making required lump sum payments

non-conforming loan

A loan unable to be sold to Fannie Mae or Freddie Mac - for example a sub-prime loan

blanket loan

A mortgage covering more than one parcel of real estate, providing for each parcel's partial release from the mortgage lien upon repayment of a definite portion of the debt.

Package Loan

A real estate loan used to finance the purchase of both real property and personal property, such as in the purchase of a new home that includes carpeting, window coverings, and major appliances.

conforming loan

A standardized conventional loan that meets Fannie Mae's or Freddie Mac's purchase requirements.

Novation

A three-way agreement in which the obligor transfers all rights and duties to a third party.

What is the major difference between a mortgage assignment right and a mortgage novation right?

Assignment cannot transfer the mortgage obligation, but novation can transfer both rights and obligations.

Novation is more of a hybrid of mortgage assumption and mortgage assignment. Novation is similar to the concept of assignment, but there are fundamental differences between the two.

Assignment cannot transfer the mortgage obligation, but novation can transfer both rights and obligations. Assignment does not always require the consent of the party that benefits from the transfer; novation does. Assignment does not extinguish the original contract, but novation does.

How are mortgage points calculated?

Each point is equal to 1% of the total amount mortgaged.

loan flipping

Encouraging a borrower to refinance a loan so that the lender can charge high points and fees for the new loan

Mortgage Points

Fees (one point equals 1 percent of the amount borrowed) charged by lenders at the time they grant a mortgage loan; they are related to the lender's supply of loanable funds and the demand for mortgages.

wraparound loan

allows a borrower who has an existing loan to get another loan from a second lender without paying off the first loan. The second lender issues a new larger loan to the borrower at a higher interest rate. The new loan is a combination of the first loan and the second loan. The borrower makes the new higher payments to the second lender, and then the second lender pays the first lender out of those funds.

What type of loan allows a buyer to borrow funds from the seller in addition to the lender?

Purchase Money Loan

What type of mortgage loans are offered to borrowers who have poor credit and the lender views them as higher risk?

Subprime Loans

Paid In Arrears

That means that when you make a payment on the first of a month (most contemporary mortgage loans are written as of the first of the month) you are paying the previous month's interest

Adjustable Rate Mortgage

the interest rate is linked to an economic index. The loan starts at one rate of interest, but then it fluctuates up or down over the life of the loan as the index changes. The loan agreement describes how the interest rate will change and when.

How is the interest rate in an adjustable-rate mortgage (ARM) determined?

The interest rate is linked to an economic index.

Fixed-rate fully amortized loans have two distinct features:

The interest rate remains fixed for the life of the loan. The payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term.

Convertibility

This feature gives the borrower the option to convert to a fixed-rate mortgage

partially amortized loan

This means that the monthly payments are not large enough to fully amortize the loan by the end of the term, leaving the large balloon payment due

fully amortized loan

the borrower has the same payment amount every month. The payment goes first to the interest and then to the principal

Fixed Rate Mortgage vs. Adjustable Rate Mortgage

When borrowers make fixed extra payments to principal on a fixed rate mortgage, they shorten the term but don't change the payment. When they make fixed extra payments to principal on an ARM, they reduce the payment on rate adjustment dates, but don't change the term. This makes ARMs attractive to those who want to reduce their payments, and FRMs attractive to those who want to shorten their term.

How does a reverse annuity mortgage operate?

With a reverse annuity mortgage (RAM), the lender is making payments to the borrower. The RAM allows older property owners to receive regular monthly payments from the equity in their paid-off property without having to sell.

amortization plan

a borrower makes a periodic (usually monthly) payment of principal plus interest These payments result in the loan being paid off gradually over time. Amortized loans are usually fixed-interest, long-term loans of 15 or 30 years. At the end of the loan term, the full amount of the principal and all of the interest is totally paid off and the balance is zero.

balloon mortgage

a loan that has one large final payment due when the loan matures

Reverse Annuity Mortgage (RAM)

a mortgage in which the lender uses the borrower's house as collateral to buy an annuity for the borrower from a life insurance company; also called an equity conversion

adjustable-rate mortgage

a mortgage whose rate of interest is adjusted periodically to reflect market conditions.

Purchase Money Loan

a technique in which the buyer borrows from the seller in addition to the lender.

seller leaseback

a transaction in which a person sells property and then leases or rents from the new property owner

How does a seller leaseback transaction work?

a transaction in which a person sells property and then leases or rents from the new property owner. The seller no longer owns the property, but lives in the property for the length of time stated in the rental agreement.

Construction Loan

a type of open-end mortgage, also known as interim financing finances the cost of labor and materials as they are needed and used throughout a building project

straight amortized loan

the borrower pays a different amount with each payment. A fixed amount goes to the principal with each payment

installment land sales contract

also called a contract for deed, the buyer does not receive legal title until the final payment is made. The seller keeps legal title until the debt is paid in full. The buyer receives equitable title until the debt is fully paid. The buyer agrees to give the seller a down payment and to make regular payments of principal and interest for some agreed-upon number of years. The buyer also agrees to pay real estate taxes and insurance premiums and to maintain the repairs and upkeep of the property. Many installment contracts contain a provision that allows the seller to cancel the contract, keep all payments and evict the buyer if the buyer defaults. But many states require the seller to refund at least a part of the buyer's payments in that situation.

Straight Loan

also called an interest-only loan, the monthly payments are allocated only to interest. No principal is paid off

Land Contract

an agreement between a buyer and seller of property in which the buyer makes payments toward full ownership, but in a land contract, the title or deed is held by the owner until the full payment is made.

Home Equity Loan

an alternative to refinancing. It can be given as a fixed amount or it can be a line of credit that the home owner can borrow against as he or she needs

open-end loan

an expandable loan in which the lender gives the borrower a limit up to which he or she may borrow. Each advance the borrower takes is secured by the same mortgage. This loan is also known as a mortgage or deed of trust for future advances.

Prepayment Penalty

clause in a mortgage contract stating that a penalty will be assessed if the mortgage is prepaid within a certain time period

Origination points

collected from the buyer as a means of paying for the loan application process

Assumability

new home buyer has the ability to take over the existing mortgage of the seller as long as the lender of that mortgage approves

predatory lending

one that literally "preys" on the customers who may fall into the "B," "C" or "D" lending categories, particularly those who do not speak English, are poorly educated or are elderly.

Discount points

prepaid interest on the loan; allows the borrower to "buy" a lower rate

If a grantee takes title to a property "subject to" a mortgage

that person is not personally liable to the lender for payment of the mortgage. The seller is still responsible for making the mortgage payments. With this approach, as long as the new owners are financially able and believe it is to their advantage, they will keep up the payments on the mortgage. However, if for some reason the buyers believe that there is no advantage to making further payments or if they become unable to do so, they may default on the payments. If they do this, they risk losing all the equity they have in the property. However, they cannot be held personally liable for the amount of the debt they assumed. The original owner is still personally and legally responsible for the loan and he or she may be held liable for any deficiency judgment that could be the result of a foreclosure sale.

mortgage assumption

the act of acquiring title to a property that already has an existing mortgage and agreeing to be personally liable for the terms and conditions of the mortgage, including the payments

Negative Amortization

when scheduled payments are made that are less than the interest charge due on the loan at the time. When a payment is made that is less than the interest charge due, deferred interest is created and added to the loan's principal balance

Mortgage assignment

when the original lender transfers the mortgage loan to a third party.