Chptr 13 Real Estate Financing Principles
Terms in this set (44)
Under this theory, which is the older, more traditional approach, a 2 party mortgage instrument is used as security for the debt. The borrower (mortgagor) retains both legal & equitable title to the property & the lender (mortgagee) is given the right to have the property sold through judicial foreclosure process & the proceeds applied to the debt, should the borrower default under the terms of the mortgage loan.
This theory uses the 3 party deed of trust instrument (a form of mortgage) as security for the debt. The borrower (grantor or trustor) actually conveys legal title to the trustee (third party) to hold for the lender (beneficiary) until the debt is satisfied. The borrower retains equitable title to the property. This means the borrower has the right to use & possess the property as if he or she owned it & to demand return of the legal title when the debt is repaid. Upon request of the lender the trustee can initiate the power of sale foreclosure to sell the property if the debt is not pd. per the terms of the promissory note. NC follows this theory.
A written promise or agreement to repay a debt in definite installments with interest.
Mortgage or Deed of Trust
The security instrument that is the document that pledges the property to the lender as security or collateral for a debt.
Act of pledging real property as security for payment of a loan w/o giving up possession of the property.
Essential elements of a note
Term, Promise to pay & signature of the borrower.
Written promise or order to pay a specific sum of money. Its holder, the payee, can transfer the right to receive payment to a third party. Ex: checks & bank drafts
Note that does not contain "to order or to bearer" but is payable to a named person. It is neither transferable or assignable.
Clause that provides that if a borrower defaults, the lender has the right to accelerate the maturity of the debt to declare the entire debt (plus accrued interest & costs) due & payable immediately, even though the terms originally allowed the borrower to make amortized payments over a period of years. W/o this clause, the lender would have to sue the borrower every time a payment became due & in default.
Prepayment penalty clause
Clause in the promissory note requiring that the borrower pay a penalty against the unearned portion of the interest for any payments made ahead of schedule.
Due on sale clause or alienation clause
Clause that provides that on sale of the property by the borrower to a buyer who wants to assume the loan, the lender has the choice of either declaring the entire debt to be due and payable immediately or permitting the buyer to assume the loan at current market interest rates.
Direct reduction loans
Loans that require a fixed amount of principal to be paid in each payment with the amount applied to interest varying as the balance is reduced.
Principal, Interest, Taxes & Insurance
Partially amortized fixed-rate mortgage
Loan when the monthly payments are a constant amount, but that payment amount is not sufficient to completely pay off the loan within the loan term. At maturity, a balloon payment will be due to pay the remaining principal.
Straight Line amortized mortgage
Loan where the mortgagor may pay a different amount for each installment, with each payment consisting of a fixed amount credited toward the principal plus an additional amount for the interest due on the principal outstanding since the last pyt. was made.
Process of charging interest in excess of the state law rate is this and is illegal.
The return or profit on a loan.
Fixed rate level payment mortgage
Most popular repayment plan aka fully amortized fixed rate mortgage.
Interest Only mortgage (term loan)
A plan that calls for periodic payments of interest only, with the principal to be paid in full at the end of the loan term. Aka Term Loan or Straight Loan
Adjustable rate mortgage ARM
Loan that originates at one rate of interest, with the rate fluctuating up or down during the loan term based on the movement of a published index. Generally, these interest rate adjustments are limited to one per period, & a max amount of increase or decrease may be made over the life of the loan. Sometimes this can be adjusted monthly & the borrower is usually given the option to repay the loan in full w/o penalty whenever the interest rate changes.
Note rate (contract rate)
The original rate charged, which is stated in the closing documents.
Interest rate on the outstanding balance of the loan is increased or decreased according to the movements of named publicly published index.
Amount of interest a lender charges over and above the index rate. This amount remains fixed for the entire life of the loan.
Interest rate caps
Theses limit the amount the interest rate may increase or decrease in any one adjustment period. They also limit the amount the interest rate can increase over the life of the loan.
This sets the maximum amount for payment changes, protects the mortgagor against the possibility of individual payments the mortgagor can't afford.
This establishes how often the loan rate may change.
This permits the mortgage to be converted from an adjustable rate to a fixed rate loan at certain intervals during the life of the mortgage.
Graduated payment mortgage
This flexible payment plan allows a mortgagor to make lower monthly payments for the first few years of the loan (typically the first five) and larger payments for the remainder of the term, when the mortgagors income is expected to have increased. The interest rate is fixed for the life of the loan.
Balloon payment loan
Loan that requires periodic payments what will not fully amortize the amount of the loan by the end of the loan term, then the final payment is an amount that is larger than the previous payments.
Growing equity mortgage GEM
AKA rapid payoff mortgage makes use of a fixed interest rate, but payments of principal are increased according to an index or schedule. The total payment increases, but the borrowers income is expected to keep pace, and the loan is paid off more quickly.
Loan that requires the borrower to make a loan payment every two weeks instead of once a month. This results in the borrower paying one extra payment per year. This usually pays the loan off in about 20 or 21 years instead of 30.
Shared appreciation mortgage SAM
Under this mortgage, the lender originates the mortgage at a favorable interest rate (several points below the going rate) in return for a guaranteed share of any gain the borrower reallizes when he or she eventually sells the property.
Right of defeasance
Right to have legal title to the property transferred back to him or her when the loan is pd. in full.
Satisfaction of mortgage
Aka deed of release, reconveyance deed, release of mortgage or mortgage discharge. This document reconveys to the borrower all interest in the real estate that was conveyed to the lender by the original recorded mortgge or deed of trust document.
Equity of redemption
Provides that if, during the course of a foreclosure proceeding but before the confirmation of the foreclosure sale, the borrower pays the lender the total amount due, plus costs, then the borrower retains the property.
Statutory redemption period
When a mortgagor has within 10 days after auction to redeem the property.
Judgement when after the foreclosure sale of the real estate secured by a mortgage or deed does not produce sufficient proceeds to pay the loan balance and accrued unpaid interest plus costs of sale, the lender may be entitled to a personal judgement against the maker of the note for the unpaid balance. Can also be obtained against any endorsers or guarantors of the note.
Loan where both real property and personal property are financed together.
Loan that covers two or more parcels of land. Used often by developers.
Equitable right of redemption
Time period up to foreclosure.
Statutory right of redemption
The 10 day upset period for redemption after the foreclosure.
Loan usually given to the elderly who otherwise may not qualify for a loan, that is paid on a specific date or upon death.
A method of creating an agency relationship in qhich a person states incorrectly that a second person is the first persons agent & a third person relies on that representation.
Purchase money mortgage
A note secured by a mortgage or deed of trust given by a buyer, as borrower, to a seller, as lender, as part of the purchase price of the real estate.