RE Principles Chapter 6 and 7

Subordination Clause

A clause in a junior or a second lien permitting retention of priority for prior liens. A subordination clause is also used in a first deed of trust, permitting it to be subordinated to sub sequent liens as, for example, the liens of construction loans.

Alienation Clause

A clause that gives the lender the right to call a loan upon sale of real estate. Also called a due-on-sale clause.

Deficiency Judgment

A judgment given when the security pledge for a loan does not satisfy the debt upon its default.

Adjustable Rate Loan

A mortgage where the interest rate may go up or down, thereby the monthly payment may decrease or increase over the life of the loan.

Installment Note

A note that provides that payments of a certain sum or amount be paid on the dates specified in the instrument.

Proration

Adjustments of interest, taxes, and insurance on a pro rata basis as of tl1e closing date. Fire insurance is normally paid for three years in advance. When a property is sold during this time, the seller wants a refund on that portion of the advance payment that has not been used at the time the title to the property is transferred. For example, when me property is sold two years later, tl1e original buyer wants to receive one-third of the advance premium that was paid.

Straight Note

Commonly referred to as an "interest only" note. Under the straight note, the borrower agrees to pay the interest, usually monthly, and to pay the entire principal in a lump sum on the due date.

Equal Credit Opportunity Act

Federal law that prohibits lenders, when granting a loan, from discriminating based on a borrower's sex, race, color, religion, age, marital status, or handicap, in addition to other items.

Truth-in-Lending Law

Law with the purpose of helping borrowers understand how much it costs to borrow money.

Prepayment Penalty

Penalty for the payment of a mortgage or trust deed note before it actually becomes due if tl1c note does not provide for prepayment.

Installment Contract

Purchase of real estate wherein the purcl1asc price is paid in installments over a long period of time; title is retained by seller and upon de fault, the payments are forfeited. Also known as a land contract.

Interest

The charge, in dollars, for the use of money for a period of time. In a sense, the "rent" paid for the use of money.

Amortization

The liquidation of a financial obligation on an installment basis; also, recovery, over a period, of cost or value.

Negative Amortized Note

The loan payment does not cover even me monthly interest. Each month this shortage is added to the principal owed, resulting in an increased loan balance, which in rum, incurs additional interest.

Leverage

The use of borrowed funds to obtain an asset.

Hypothecate

To give a thing as security without the necessity of giving up possession of it.

Proration

is the act of making an equitable distribution of these expenses in escrow at the close of the sale.

Beneficiary

( 1) One entitled to the benefit of a trust; (2) one who receives profit from an estate, the title of which is vested in a trustee; or (3) the lender on the security of a note and deed of trust.

Acceleration Clause

A clause in a trust deed or mort gage giving me lender the right to call all sums owed to the lender to be immediately due and payable upon the happening of a certain event.

Real Estate Settlement Procedures Act

A federal disclosure law effective June 20, 1975, requiring new procedures and forms for settlements (closing costs) involving federally related loans.

Documentary Transfer Tax

A state-enabling act that allows a county to adopt a documentary transfer tax to apply on all transfers of real property located in the county. Notice of payment is entered on the face of the deed or on a separate paper filed with the deed.

Commission

An agent's compensation for performing agency duties; in real estate practice, a percentage of the selling price of property, percentage of rentals, and so on.

Annual Percentage Rate (APR)

Not an interest rate, but rather percentage rate that reflects the effective interest rate on the loan, including other prepaid financing charges such as loan fees, prepaid interest, and tax service fees.

Trustor

One who deeds property to a trustee to be held as security until the trustor has performed any obligations to a lender under terms of a deed of trust.

Trustee

One who holds property in trust for another to secure the performance of an obligation.

Principal

The employer of an agent or me amount of money borrowed or the amount of a loan.

Rate

The percentage of interest charged on the principal.

Capitalization Rate

The rate of interest that is considered a reasonable return on the investment and used in the process of determining value based on net in come. It may also be described as the yield rate that is necessary to attract the money of the average investor to a particular kind of investment. This amortization factor can be determined in various ways; for example, by the straight-line depreciation method. (To explore this subject in greater depth, refer to cur rent real estate appraisal texts.)

Balloon Payment

Where the final installment payment on a note is more than twice as great as the pre ceding installment payments, paying the note in full.