RP:13- Financing, prommisory notes, deeds of trust, mortgages, subject vs assuming,interest points
Adjustable Rate Mortgage, or ARM
1) Adjustable-rate Loan (sometimes called ARM): Interest rate fluctuates and is usually tied to an index; increases are capped for each period and for the term of the loan. INDEX is often tied to U.S. Treasury securities. The interest rate is usually the index plus a premium called the Margin. Remember that an Adjustable Rate Mortgage is tied to an index, and the rate of the loan goes up or down, depending on the caps, margin, and adjustment period. Yearly caps limit the amount of the interest rate that may be charged during any one adjustment period. Lifetime caps set the maximum amount for payments. For the rest of the story on ARMs go on to the next screen. How often the loan rate may be changed is determined by the Adjustment Period. Most have both yearly rate caps, which limit the amount the rate may change at one time, and lifetime caps, which limit the amount the rate may increase over the life of the loan. 2) Graduated Payment Plan: Lower payments first year, then payments increase. Example: FHA 245 program is a graduated payment plan loan. You will have to remember this FHA program plan number and its purpose. Monthly payments will go up! This is an excellent loan for a young executive (doctor, lawyer) whose income will increase over the years. 3) Reverse Annuity Mortgage (RAM): Homeowner receives monthly payments based on accumulated equity rather than a lump sum. Loan must be repaid upon the death of the owner or sale of the property. Most advantageous for senior citizens who own their own home - house rich/cash poor. 4) Part Purchase Money: or Purchase Money Mortgage (PMM): A mortgage given as part of the buyer's consideration (cash) for the purchase of real property, and delivered at the same time that the real property is transferred as a simultaneous part of the transaction. It is commonly a mortgage taken back by a seller from a purchaser in lieu of purchase money. 5) Package Mortgage: Loan on real estate, plus fixtures, and appliances; always includes personal property as well as real property. Used extensively in the sale of condominiums (The property comes with the refrigerator, stove, drapes, washer and dryer.) 6) Blanket Mortgage: Loan on several pieces of land. Blanket mortgages usually contain a Partial Release Clause. This is a clause in a mortgage/deed of trust under which the mortgagee/beneficiary agrees to release certain parcels from the lien of the blanket mortgage/deed of trust upon payment by the mortgagor/trustor of a certain sum of money. Example - A builder purchases 100 acres of land, and develops it into 100 one-acre lots. As a lot is sold, in order to give the purchaser clear title, that lot needs to be released from under the blanket mortgage. So the builder pays the lender for the lot, and can now issue a deed to the purchaser (usually a General Warrantee Deed). 7) Open-end Mortgage/deed of trust: Loan that is expandable by increments up to a maximum dollar amount. The full loan is secured by the same original mortgage/deed of trust. Lender is allowed to increase the outstanding balance of a loan up to the original amount of the loan in order to advance additional funds. Example: A farmer needs to borrow money to plant his/her crop. The bank agrees to lend the farmer up to a certain amount of money based on the value of the property. The farmer can borrow all of the money at one time or borrow as needed. After the crop grows, and the farmer hopefully is able to harvest it, sell it, and make a profit he/she can repay the loan without a prepayment penalty. If it is a bad year for the farmer, as long as payments continue to be made, the bank will be happy to accept the interest on the loan. Of course, if the farmer does not pay, foreclosure can occur. 8) Wraparound: Additional financing from a second lender. One payment--two loans. The new lender pays the first loan, but charges higher interest for a second. Original loan must be assumable with no alienation clause. Type of loan where the original 1st mortgage is not disturbed. Example: You are interested in purchasing a property, but interest rates are high, and your lender will not make you a loan. You and your lender discover that the seller has an FHA or a VA loan. Remember, that this type of loan cannot have an alienation (due on sale) clause. Your lender agrees to assume the seller's mortgage, and make you a loan for the entire amount you need to purchase the property. 9) Buydown: The payment is subsidized at the beginning by a builder or other party for 3 to 5 years, and thereafter, the purchaser takes over and pays the regular payment amount. This is a financing technique used to reduce the monthly payment for the home-buying borrower during the initial years. As interest rates climbed in the late '70s and early '80s, many families could not qualify for sufficient loans needed to purchase a home. This type of help from a builder or from the borrower him/herself allowed a family to qualify for a lower interest rate loan. 10) Construction Loan: Two types-- 1) The lender commits the full amount of the loan to the borrower, but makes partial progress payments as the building is being completed after lien waivers have been obtained. 2) High interest rate to builders, usually one percent over prime rate, to be loaned for "spec homes." It is converted to Take-out on a long term basis. A builder's construction loan is considered by lenders to be a much higher risk loan than a residential home loan. 11) Takeout Loan: Long term permanent financing for large construction projects, usually commercial. Replaces construction loan on large commercial projects. 12) Sale-Leaseback: Owner sells his or her improved property and at the same time signs a long-term lease. Example: A commercial property is sold on the condition that the new owner lease it back to the seller at the time title passes. Grantor (original seller) becomes the lessee and the grantee (new owner of the property) becomes the lessor. In a sale-leaseback, the grantor (original seller) had a "Freehold estate." After the sale, the new tenant (the original grantor) ends up with a "Less than freehold estate" (a leasehold estate). 13) Participation Mortgage: A mortgage in which the lender participates in the income of the mortgaged property beyond a fixed return, or receives a yield on the loan in addition to the straight interest rate. Example: An insurance company teams with a bank and a purchaser to buy a property. 14) Bridge Loan: Short-term interim loan for buyer, usually six months to one year in duration. May be placed on former house to buy new house until first house sells. 15) Contract for Deed: Also called an installment land contract where the buyer does not receive legal title until the final payment is made. Seller is vendor, buyer is the vendee. Seller keeps legal title until the debt is paid in full. Buyer receives equitable title until debt is paid in full.
Monthly Loan Payments
A monthly loan payment consists of: Principal - The amount borrowed from the lender. Interest - The amount paid to the lender for allowing the money to be borrowed. Taxes - The amount due to the government for the privilege of private ownership of real property. Insurance - The amount paid to the insurance company in case of damage to the property. There could also be mortgage insurance due. IV. Recording: A mortgage or deed of trust, if recorded, must be recorded in the city, county, or municipality where the property is located.: Junior mortgages are second mortgages or deeds of trust. The priority of junior liens is determined by the date and time of recording.
Calculating Loan Balances
Another type of math problem that is involved in financing: Determining the amount of interest and principal in a mortgage payment, and then calculating loan balances. Note: For the purposes of the test you will not have to know how to determine the payment amount. This will be given to you. In practice, there are tables and calculators available that you can use to assist buyers by giving them an estimate of what their mortgage payment will be. ALWAYS REMEMBER- If you are given the monthly interest portion of a loan payment, and the interest rate, you must first get the annual interest payment (multiply by 12), and then divide by the interest rate. EXAMPLE: If the loan is for $15,000 at 10% interest for 25 years and the payment is $140 per month (including principal and interest), what is the principal balance after one payment? STEP 1: Determine the annual amount of interest paid based on the loan balance. $15,000 X 10% = $1,500.00 year interest STEP 2: Divide the annual amount of interest by twelve to determine the monthly interest amount. $1,500.00/12 = $125.00 month interest Go on to the next screen for the rest of the steps to complete this problem. STEP 3: If the payment of $140 includes both interest and principal, then we can subtract the interest amount from $140 to determine the amount that was applied to principal. $140 - $125.00 = $15.00 (principal paid) STEP 4: Now, we can apply the principal to the loan balance to get the loan balance after one payment. $15,000 - $15.00 = $14,985.00 (new balance). (Sales students must know how to reduce a loan by at least one month, as we did above.) Before you go on to the next screen, assume the loan balance is now $14,985.00 and find the loan balance after the next month using the same steps you used above. Now, how do we determine the loan balance after the second payment? Repeat the process but use the new balance as the loan amount. (Broker students must know how to reduce a loan by at least two months, as described below.) STEP 5: Principal Balance X Annual Percentage Rate $14,985.00 X 10% = $1,498.50 annual interest amount. STEP 6: Annual interest amount divided by 12 to get monthly interest amount. $1,498.50/12= $124.88 interest a month STEP 7: Subtract monthly interest amount from the payment of $140 to get principal portion of payment. $140 - $124.88= $15.12 principal paid STEP 8: Apply this principal payment to the loan balance. $14,985.00-$15.12 =$14,969.88 loan balance after the second payment.
More Mortgages and Deeds of Trust
Duties of the borrower in a mortgage or deed of trust: Payment of the debt in accordance with the terms of the note. Payment of all real estate taxes on the property given as security. Maintenance of adequate insurance. Maintenance of the property in good repair at all times. Lender authorization prior to making any major alterations to the property.
Factors and Monthly Payments
Factors: One way that loan officers and real estate licensees are able to determine monthly payments is by the use of factors. A factor is the cost per thousand that is required to create the principal and interest payment necessary to pay off the loan. Look at the chart below. Factors (per thousand) necessary to make equal monthly payments to amortize a loan. Years 6% 7% 8% 8.5% 9% 9.5% 1 86.07 86.53 86.99 87.22 87.46 87.69 5 19.34 19.81 20.28 20.52 20.76 21.01 10 11.11 11.62 12.14 12.40 12.67 12.94 15 8.44 8.99 9.56 9.85 10.15 10.45 20 7.17 7.76 8.37 8.68 9.00 9.33 25 6.45 7.07 7.72 8.06 8.40 8.74 30 6.00 6.66 7.34 7.69 8.05 8.41
V. Foreclosure
Foreclosure is the legal process whereby the property pledged as security in the mortgage documents or the deed of trust is sold to satisfy the debt (promissory note). ORDER OF PAYMENT IN FORECLOSURE Cost of Sale - advertising, attorney fees, trustee fees, etc. Special assessment taxes, and general taxes which are called "ad valorem," according to value taxes, are paid after the costs of the sale. The first mortgage, which is determined by the order of recording. Whatever is recorded next would then be paid because of a foreclosure. Judicial foreclosure is required to foreclose a Mortgage. One must go through the courts to foreclose. Non-Judicial foreclosure is required to foreclose on a Deed of Trust. The lender does not have to go through the courts to foreclose; and it is, therefore, a quicker process. The trustee holds a "naked title" (one without possessory rights) and can claim the property. The Equitable Right of Redemption gives the borrower the right to clear up the debt prior to the foreclosure sale. The Statutory Right of Redemption gives the borrower a certain amount of time after the sale to clear the debt.
Figuring out the Buyer's P & I Payments
HERE IS ANOTHER MATH PROBLEM YOU COULD BE ASKED TO FIGURE OUT: A buyer got a 30-year loan of $50,000 with an interest rate of 10%, a factor of 8.78. What will the buyer's monthly P & I be? $50,000 = 50 thousands. Take 50 times factor of 8.78 = $439.00 per month for 30 years. Another way to figure out the answer to this question is to move the factor's decimal point over three places and take it times the loan balance. .00878 x $50,000 = $439.00 per month for 30 years. Note: The longer the loan, the lower the interest rate = lowest factor = lowest payment for the buyer. Example: A 30 year loan at 7% interest will produce a lower monthly payment than a 15-year loan at 7% interest. Determining how much interest the buyer pays over the life of the loan. Example: The loan amount is $50,000, and the monthly principal and interest payment will be $439.00 a month for 30 years. How much interest will be paid over the term of the loan? Step 1 - Take the monthly Principal & Interest payment that will be given to you, and multiply it by 12 to obtain the amount paid per year, and then multiply by the number of years the loan will be in existence. $439.00 x 12 months x 30 years = $158,040 = total amount paid in P & I. Step 2 - Then subtract the loan amount ($50,000 principal) from the $158,040 ($158,040 - $50,000 = $108,040.00), which is the amount of interest paid over the life of the loan.
More About Points
Here is another example of a question involving points: On a $250,000 loan, the lender charges a 2-point service charge. How much does the buyer have to pay at closing, and how will it appear on the settlement statement? Multiply $250,000.00 X 2% = $5000.00 debit to the buyer. If you were given the dollar amount of the points in the question above and the percentage of points, and you were asked the loan amount: Just divide $5000.00 by 2% to obtain the loan amount of $250,000. If you were given the dollar amount of the points and the loan amount you can obtain the percentage by dividing $5000.00 by $250,000.00 = 2%. REMEMBER: THE SMALL NUMBER ALWAYS GOES INTO YOUR CALCULATOR FIRST WHEN YOU ARE DIVIDING TOP TO BOTTOM. If the current rate in the market is a 12% interest rate, and the lender will give the loan to the buyer for 11.5% interest, the lender will need to charge 4 discount points, each worth 1% of the loan balance. Expressed in dollars, points work out this way . . . For example: Loan A Loan B $50,000 loan $50,000 loan 12% interest rate 11.5% interest rate 0 points 4 points @ $500 each = $2000 By charging points, the lender is able to make lower interest rate loans, but the buyer must come up with the point money in cash at the time of closing. Points paid at closing would always be a debit (charge) to the buyer at closing on the loan amount, not the sale price.
Clauses
II. Clauses in a Mortgage or Deed of Trust Instrument Acceleration Clause: If a borrower defaults on the loan (misses payments, etc.) the lender can call the entire balance due and payable immediately. The mortgagee or beneficiary (lender) benefits because of the presence of an acceleration clause. Without this clause in the mortgage or deed of trust the lender would not have the power or right to foreclose. Alienation Clause: "Due on Sale Clause." The mortgagee or beneficiary declares the entire balance of the loan becomes due and payable when the property is transferred. When this clause is contained in the Mortgage or Deed of Trust, it prevents the assumption of the loan by a new purchaser. This clause is the right the lender has to say, "No one can assume this loan or have any interest in the property without permission from me!" This type of clause is not allowed in an FHA (Federal Housing Administration) or VA (Veteran's Administration) loan. Satisfaction Piece: When the borrower has paid the entire balance, the lender is required to execute a satisfaction of mortgage or a release deed of trust. Examples of Satisfaction Pieces are: Satisfaction of Mortgage - A certificate issued by the mortgagee when a mortgage is paid in full. Upon payment in full of the debt secured by a mortgage, it is said that the mortgage is "satisfied." Deed of Reconveyance (deed of release) - A document used to transfer legal title from the trustee back to the borrower (trustor) after a debt secured by a deed of trust has been paid to the lender (beneficiary). The Satisfaction Piece puts on public record that the loan was paid, and that the lender no longer has a lien on your property. Recording the satisfaction piece releases the Mortgage or Deed of Trust lien. When a mortgage or deed of trust is paid off, a defeasance clause allows the lender to release the mortgage or deed of trust rights and issue a Satisfaction Piece. A Prepayment penalty clause is a clause that allows a lender to charge extra interest if the loan is paid off before the normal completion date. Example: You sell your property after 10 years of ownership, and your original loan was for 30 years. If your mortgage or deed of trust indicates, the lender (mortgagee or beneficiary) can charge you a prepayment penalty on the balance of the loan. Once again, you will learn later that this clause is not allowed on an FHA or VA loan. A Subordination clause is a clause in a Mortgage or Deed of Trust wherein a subsequent mortgage or deed of trust takes priority. Example, the first deed or mortgage holder becomes the second deed or mortgage holder in the order they were recorded in priority - the second becomes the first. This clause is further defined as a "change in priority positions between holders of liens on a Mortgage or Deed of Trust in case of foreclosure." Subrogation is the substitution of a third person in place of a creditor to whose rights the third person succeeds in relation to the debt. Example: A title company that pays a loss within the scope of its policy is subrogated to any claim that the buyer has against the seller for a loss. Or if you have an automobile accident, your insurance company will pay any claims against you.
Subject To Versus Assuming
III. "SUBJECT" TO VS. "ASSUMING" An assumption is when the buyer takes over the original payment, the original loan, and the original interest rate of the seller's existing loan. This can be accomplished in one of two ways. If a Mortgage or Deed of Trust is taken over: "Subject to" an existing Mortgage or Deed of Trust. If the clause in the deed states that the buyers are purchasing the property "subject to the existing loan," the buyers acknowledge the existing loan and promise to pay. If the buyer does not pay, the original borrower will be held responsible. If the original borrower (grantor) does not pay, the buyer (grantee) will lose the property, and thus his or her equity, in a foreclosure sale. If a Mortgage or Deed of Trust is: "Assumed," the purchaser is accepting the debt and is, therefore, personally liable for the entire debt. The bank could require the original seller to remain secondarily liable if the new borrower does not pay. The seller would no longer be liable if the lender will consider a novation*. *Novation is a second contract to assume liability for the debt for the purchaser and relieve the liability to the seller. Tax and Insurance Escrows (also may be called an Impound or Reserve Account) As a result of a lender requiring tax and/or insurance escrows, a "Budget Mortgage or Deed of Trust" occurs. By placi
Deficiency Judgment and Deed in Lieu of Foreclosure
If the proceeds from the foreclosure sale are not sufficient to cover the debt, the lender can go to court and seek: A Deficiency judgment against the borrower. This is a general lien and would apply to all of the borrower's assets. Deed in lieu of foreclosure is referred to as a "friendly foreclosure." Lender and borrower agree that the lender will become the owner of the property instead of going through the formal foreclosure process. However, this process does not clear any junior liens.
Discount Points
In theory, (a rule of thumb) eight discount points are required to increase the percentage yield from 11% to 12% or any other one percentage point spread. Look below for another example of how discount points are used to increase the lenders yield on an investment in a loan on real estate. Conv. Loan interest rate VA Loan interest rate 16% 15% = 8 pts. 15 3/4% 15% = 6 pts. 15 1/2% 15% = 4 pts. 15 1/4% 15% = 2 pts. If the conventional loan is at 15 1/4% and VA loan is at 15%, the lender will want to charge 2% to invest in the 15% VA loan which would increase his/her yield on the investment. If the conventional loan is at 15 1/2% and the VA loan is at 15%, the lender will want to charge 4 points to increase his/her yield on the investment. If the conventional loan is at 15 3/4% and the VA loan is at 15%, the lender will want to charge 6 points to increase his/her yield on the investment. If the conventional loan is at 16% and the VA loan is at 15%, the lender will want to charge 8 points to increase his/her yield on the investment.
Leverage
Leverage is the principal of using other people's money to make investments, such as buying homes. The lower the down payment, the higher the risk to the lender. The lower the down payment, the higher the "leverage" obtained by the borrower. Example: 10% down = 90% loan - This would be a "highly leveraged" loan. 25% down= 75% loan would not be as highly "leveraged" because the borrower put more money down. This loan would be considered by a lender to be a low risk investment. The ratio of loan amount compared to the value of the property is called the Loan to Value Ratio (the amount of a loan expressed as a percentage of the value of the real estate offered as security) or LTV. Example, if a borrower purchases a property for $100,000, and borrows $80,000 he/she is said to have an 80% ($80,000) loan to value ratio. The value in a property held by the owner in excess of any liens against it is called EQUITY. In the example above, the buyer's equity is $20,000 or 20%.
Mortgages and Deeds of Trust
Look! There are two E's in the word Lender and two O's in the word borrower. The parties to a mortgage or deed of trust instrument are explained below: In a mortgage, there are two parties involved: MORTGAGOR = Borrower MORTGAGEE = Lender In a Deed of Trust, there are three parties involved. They are: Trustor = Borrower Beneficiary = Bank Trustee = Bank Vice-President or anyone else designated by the lender (holds naked legal title and the right to foreclose with directions from the beneficiary) Under a Deed of Trust, the beneficiary (lender) holds the promise to repay (Promissory Note) from the borrower. Under a Deed of Trust, the trustee holds the security (Deed of Trust) for the debt. A mortgage or deed of trust document and a promissory note are similar in that they are both contracts between the borrower and the lender. * Remember that in CALIFORNIA , lenders use a DEED OF TRUST (also called a TRUST DEED) to secure an interest in the borrower's real property. Mortgages are RARE in California , since most lenders insist on using deeds of trust, which favor the LENDER OVER THE BORROWER.
Loans
Next, we will outline the different types of loans available to a borrower currently in the real estate market. It will be necessary for you to learn and retain the definitions of each of these types of loans. Keep in mind that some of these will be refreshers that you've learned earlier in this unit, but we wanted you to see them all in one group. A type of a loan where only interest is paid is called: A Straight Term Loan, or Interest Only Loan. The borrower must be prepared to pay the entire principal at the end of the time period! A type of loan where interest and principal are paid on an equal basis until the final payment, which is larger, is called a Balloon or a Partially Amortized Loan. A balloon is the remaining balance that is due at the maturity of a note or obligation. Fully Amortized - Regular payments of principal and interest are made and the entire loan is paid off by the end of the term. The liquidation of a debt by periodic installments. Below is an example of a fully amortized loan. Amortized Loan: $50,000 11.6% interest Principal & Interest Payment = $500 1st Payment = $483.33 interest, $16.67 principal 360 payment = $16.67 interest, $483.33 principal 360 payments - 12 payments, 30 years results in total paid of $180,000 minus original loan of $50,000 = total spent on interest over the life of the loan = $130,000! A Budget Mortgage is a loan, which has a payment composed of principal, interest, taxes, and insurance. This type of mortgage was discussed in detail earlier in this unit.
The Background of Financing
Real Estate Financing Principles I. Real Estate Financing: Principles There are two parts to a mortgage loan: a Pledge or promise to pay, and Collateral, which allows a lender the right to foreclose if the borrower does not pay. A promissory note sometimes called a mortgage note (Pledge) is the promise to repay the debt. It is an I.O.U. It is the primary evidence that there is a loan between the lender and the borrower. If a person only signs a note, without using property as collateral, it is referred to as a DEBENTURE. A DEBENTURE is defined as a long-term note that is not secured by a specific property. A promissory note is a negotiable instrument, which means that the lender can sell the note to a third party. Example, the lender feels he/she can make more money lending on something other than your mortgage. He/she decides to sell your promissory note to another lender. You receive a notification in the mail to pay the new lender. You did nothing wrong; you have been paying on time for the last 15 years, but now you will pay another party. By the way, it is always a good idea to check with the original lender to be sure your note sold to a new lender. Most real estate loans are collateralized loans. The lender wants the security to know that if the borrower does not pay the promise made in the note that they can foreclose on the property. There are two types of security instruments. They are a MORTGAGE or a DEED OF TRUST. These instruments are both used for the same purpose: They create the collateral for a loan by promising the property in case of default by the borrower. The major difference between the two instruments are the number of parties involved and the method of foreclosure on default. The buyer of the property retains right to use the property exclusively while it is subject to either a Mortgage or a Deed of Trust.
Figuring out the Seller's Net
SELLER'S NET SALE PRICE 100% (minus - ) COMMISSION RATE% Hints for completing this type of question. Step 1 - Start with the amount that the seller wants to net, and add any expenses, including a mortgage that needs to be paid off. Step 2 - Subtract any refunds that the seller may be receiving in the transaction from the number that you obtained above. Step 3 - Subtract the amount of commission from 100% to obtain the aggregate (opposite) of the commission. (Example, 100% - 6% = 94%) Step 4 - Now you have the number of what the seller will net before he/she pays a commission; so divide that by the aggregate that you obtained. (Example, $54,000 divided by 94% = $57,446.81) Here is another equation regarding profit and loss: Profit or Loss Original Price Percentage of gain or loss
Promissory Notes
There are two types of promissory notes: the straight note (also known as an "interest only" note), and the installment note. Under a straight note, or interest only note, the borrower agrees to pay the interest (usually monthly), and to pay the entire principal in a lump sum on the due date. This means that each month, your payments may be $1,250 a month, BUT that $1,250.00 check you write every month is ONLY paying the interest on the LOAN, NOT PAYING ON THE PRINCIPAL OF THE LOAN, OR BRINGING DOWN THE AMOUNT OWED ON THE LOAN. SO, if you'd initially borrowed $150,000.00 for 30 years, at a 10% interest rate, it means that 30 years later, on that due date, you MUST have the ENTIRE $150,000.00 to pay to the lender. This interest rate is simply to demonstrate the way a straight note works; interest rates may vary. (Here is how we figured that out: $150,000 x 10% = $15,000 in interest charged; take $15,000 and divide it by 12 (months in the year), which brings you to a MONTHLY INTEREST payment of $1,250.00.) Again, remember that the $1,250.00 would ONLY be the interest you'd pay; NOT a penny of that would apply to your principal. The installment note, on the other hand, requires payments that include BOTH principal and interest. By the end of the 30-year loan due date, the principal has been paid in full. The installment note is the MOST COMMON type of real estate promissory note, BY FAR. An installment note that includes principal and interest of EQUAL INSTALLMENT PAYMENTS that liquidate the debt is known as a fully amortized loan. Some installment notes have monthly payments that pay the monthly interest and SOME of the principal, which means that on the loan due date, the remainder of that principal must be paid. This payment is known as a balloon payment. (Note that if any payment is greater than double a monthly payment, it is called a balloon payment.)
Equitable Right of Redemption, Foreclosure, and Statutory Redemption
Time Line of Equitable Redemption, Foreclosure and Statutory Redemption. Remember: "E" comes before "F" in the alphabet and foreclosure! Therefore the Equitable Right is the right before foreclosure, and the statutory right would be after foreclosure. Equitable Right of Redemption then Before/After then Statutory Right of Redemption Equitable Redemption - Before foreclosure the mortgagor (borrower) has a right to reclaim the property forfeited due to mortgage default, Foreclosure - Property used as security for a debt is sold to satisfy the debt in the event of default in payment of the mortgage note or default of other terms in the mortgage document. Once there is a foreclosure, this right is terminated! Statutory Redemption - This is the right of a mortgagor to redeem after a foreclosure sale under certain rules and conditions. This right is created by state statute, and varies from state to state; therefore it will not be an issue covered on your state examination. All you need to remember here is that there is such a right--not the conditions under which it can happen.
Money, Interest, and Types of Loans
VI. Money, Interest, and Types of Loans Interest The Amount of money that a lender charges for the use of money is called INTEREST. INTEREST is always expressed as a percentage per year. (6%, 7%, 10%, etc.) SIMPLE INTEREST - This is the type of interest charged on a mortgage loan. PRINCIPAL= loan balance. The maximum rate of interest that can be charged on loans may be set by state law. Charging interest in excess of this rate is called USURY or illegal interest. In addition to prepaid interest that could be charged at closing, the lender may also include points, which is additional interest that is charged at the creation of the loan. Points (sometimes called Discount Points, Service Points, or Loan Origination Fees) are used by lenders to increase their yield on loans. Prepaid interest- the total dollar amount of interest and points paid by a borrower at closing. Points or discount points are a one-time fee paid at closing to increase the yield to the investor. Points give the lender more money up front so he/she will be encouraged to make a loan at a lower interest rate. Example - One discount point = One Percent (1%) of the loan balance. A loan of $50,000 would mean 1 point equals $500 or 1% of the loan balance. The cost of points is not deducted from the loan. They would be a separate debit or charge on a settlement statement.
Loan Assumptions and Subject to Mortgages
Vendor - The seller of realty; the seller under contract for deed. Vendee - The purchaser of realty; the buyer under a contract for deed. Loan Assumption- The act of acquiring title to property that has an existing mortgage and agreeing to be personally liable for the terms and conditions of the mortgage, including the payments. (The buyer is "Taking over" the seller's responsibilities.) "Subject to mortgage"- A grantee (buyer) taking title to a real property "subject to" a mortgage (that a seller is letting the buyer take over] is NOT personally liable to the lender (mortgagee) for the payment of the mortgage note. In the event of a foreclosure the buyer would lose his/here equity. If the buyer doesn't pay, I the seller would have to pay, and if I don't pay then the property gets foreclosed on, and the buyer loses the property.
