Kap Real Estate Chapter 14: Real Estate Financing: Principles Flashcards

1
Q

What is the Lien Theory?

A

a two-party mortgage instrument is used as security for the debt.

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2
Q

Who retains both legal and equitable title to the property in a Lien Theory?

A

The borrower (mortgagor)

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3
Q

1) In the Lien Theory, who is given the right to have the property sold through the judicial foreclosure process?

2) If the borrower defaults, what happens to the proceeds from the judicial foreclosure in the Lien Theory?

A

1) The lender (mortgagee)

2) The proceeds from the judicial foreclosure are applied to the remaining debt balance

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4
Q

What is the Title Theory?

A

uses the three-party deed of trust instrument (a form of mortgage) as security for the debt

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5
Q

Who conveys legal title in the Title Theory?

A

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.

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6
Q

Who retains equitable title in the Title Theory?

A

The borrower retains equitable title to the property. This means that the borrower has the right to use and possess the property as if he or she owned it and to demand the return of the legal title when the debt is repaid.

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7
Q

What theory does North Carolina use?

A

The Title Theory

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8
Q

What can happen if the debt is not paid in the Title Theory?

A

Upon request of the lender, the trustee can initiate the power of sale foreclosure to sell the property if the debt is not paid per the terms of the promissory note.

The lender’s legal ownership is subject to termination on full payment of the debt or performance of the obligation.

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9
Q

As protection to the borrower, most states allow a _________________ during which the borrower in default can redeem the property.

A

statutory redemption period

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10
Q

Two parts to a mortgage loan exist, what are they?

A

the debt itself & the security for the debt

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11
Q

When a property is to be mortgaged, the owner must execute, or sign, two separate instruments:

A

The Promissory Note and the Mortgage/Deed of Trust

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12
Q

What is a Promissory note?

A

or financing instrument, is the written promise or agreement to repay a debt in definite installments with interest.

The mortgagor executes one or more promissory notes to reflect the amount of the debt. In some states, a bond is used as evidence of a debt secured by a mortgage.

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13
Q

What is a Mortgage (deed of trust)?

A

is the security instrument. It is the document that pledges the property to the lender as security or collateral for a debt

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14
Q

What is a mortgagor?

A

A mortgagor is a borrower who gives a mortgage to a lender, the mortgagee in return pays the money.

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15
Q

What is hypothecation?

A

is the act of pledging real property as security for payment of a loan without giving up possession of the property

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16
Q

Can a mortgage be effective legally without a debt to secure? Why or why not?

A

No. A pledge of security—a mortgage—cannot be effective legally unless there is a debt to secure.

Both the promissory note and the mortgage must be executed (signed) to create an enforceable mortgage loan.

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17
Q

What happens in a deed of trust?

A

the borrower conveys naked title or bare legal title (title without the right of possession) to the real estate as security for the loan from the borrower to a third party, called the trustee.

The trustee then holds title on behalf of the lender, known as the beneficiary, who is the legal owner and holder of the promissory note

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18
Q

The borrower (mortgagor or grantor) is required to fulfill many obligations. These usually include:

A

-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 to protect the lender if the property is destroyed or damaged by fire, windstorm, or another hazard;

-maintenance of the property in good repair at all times to not allow waste; and

-lender authorization before making any major alterations or demolishing any building on the mortgaged property.

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19
Q

What is foreclosure?

A

the process of selling the mortgaged real estate to repay the debt from the proceeds of the sale.

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20
Q

What are the three methods of foreclosure?

A

Judicial, Non-Judicial and Strict

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21
Q

What does the judicial foreclosure process look like?

A

Mortgages are foreclosed through a court process where the proceeding provides that the property pledged as security may be sold by court order after the mortgagee has given sufficient public notice.

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22
Q

On a borrower’s default, what happens in a judicial foreclosure?

A

On a borrower’s default, the lender may accelerate the due date of all remaining monthly payments. The lender’s lawyer can then file a suit to foreclose the lien.

On presentation of the facts in court, the property is ordered sold. A public sale is advertised and held, and the real estate is sold to the highest acceptable bidder. The new owner receives title to the property by means of a sheriff’s deed.

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23
Q

What is another name for a Non-judicial Foreclosure?

A

Power of Sale Foreclosure

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24
Q

What is the Nonjudicial foreclosure/Power of Sale Foreclosure clause process?

A

The power-of-sale clause gives the trustee the power to sell the property and use the proceeds to repay the debt. (Note that a mini-hearing is required before the clerk of the court; otherwise, the property cannot be sold.)

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25
Q

How do you start the process of a Non-Judicial Foreclosure?

A

To institute a nonjudicial foreclosure, the trustee or lender must record a notice of default at the county courthouse in the Clerk of Court’s office within a designated time period to give notice to the public of the intended auction.

Generally, this official notice is accompanied by advertisements published in local newspapers that state the total amount due and the date of the public sale. The trustee then conducts the sale and transfers title to the high bidder by means of a trustee’s deed. North Carolina deeds of trust allow for the power of sale foreclosure.

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26
Q

Is strict foreclosure used in NC?

A

No. We use either judicial or nonjudicial

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27
Q

What is the strict foreclosure process?

A

After appropriate notice has been given to the delinquent borrower and the proper papers have been prepared and filed, the court establishes a specific time period during which the balance of the defaulted debt must be paid in full. If this is not done, the court usually awards full legal title to the lender.

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28
Q

After the property is sold at the foreclosure sale, the proceeds are distributed in the following five-step order:

A
  1. To pay all costs of the sale, including court costs or trustee fees, legal fees, advertising fees, et cetera
  2. To pay any outstanding real and personal property taxes or assessments
  3. To pay the mortgage(s) or deed(s) of trust debt (assuming this debt has first priority over any other liens) in order of recordation
  4. To pay off any other liens in order of priority
  5. To pay any surplus (equity) to the borrower
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29
Q

Redemption has two parts. What are they?

A

equity right of redemption

statutory right of redemption.

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30
Q

What is equity of redemption?

A

Adopted by statutory law, this concept 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 of back payments due, plus interest and costs, the foreclosure is stopped and the borrower retains the property. In some cases, the borrower who redeems will be required to repay the accelerated loan in full

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31
Q

What is the Statutory Right of Redemption process?

A

Certain states also allow defaulted borrowers a period in which to redeem their real estate after the sale.

During this period (which may be as long as one year), the borrower has a statutory right of redemption. The mortgagor who can raise the necessary funds to redeem the property within the statutory period pays the redemption money to the court. Because the debt was paid from the proceeds of the sale, the borrower can take possession free and clear of the former defaulted loan.

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32
Q

How long is the Statutory Right of Redemption process period in NC and what goes on in that period?

A

During the North Carolina 10-day statutory redemption period after the auction (the upset bid period), a North Carolina mortgagor (borrower) can try to raise the necessary funds to redeem the property.

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33
Q

What happens during the Statutory Right of Redemption Upset Bid Period?

A

During the upset bid period, any qualified bidder can submit an upset bid, a bid to purchase the property for an amount that exceeds the foreclosure sale price by a specific margin. Each upset bid triggers a new 10-day period. If the defaulted borrower can pay all that is owed to the lender (including accrued interest and penalties plus cost of foreclosure sale) any time prior to confirmation of sale, the borrower redeems the property, receives legal title, and eliminates the previous winning bid.

The foreclosure sale becomes final at the end of any 10-day period when no new bid is filed and the borrower’s right to redeem the property is terminated.

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34
Q

What is the process for a deficiency judgement?

A

If the foreclosure sale of the real estate secured by a mortgage or trust 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 judgment against the maker of the note for the unpaid balance.

If any surplus proceeds exist from the foreclosure sale after real estate taxes, the mortgage debt and all junior liens (second mortgage, mechanics’ liens, et cetera) are paid off and expenses and interest are deducted. These proceeds (equity) are paid to the borrower.

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35
Q

Are deficiency judgements prohibited in NC?

A

In North Carolina, deficiency judgments are prohibited in certain cases, such as when a purchase money deed of trust (seller financing) is used. If the seller is holding a purchase money mortgage/deed of trust, the seller has a special priority in lien payoffs in the foreclosure.

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36
Q

What is a deed in Lieu of Foreclosure and how does that process work?

A

is used when a borrower has defaulted on the mortgage loan and wants to avoid a foreclosure action

With the lender’s agreement, the debtor simply gives the lender a deed in lieu of (title to the property instead of) foreclosure and, therefore, is spared both the foreclosure procedure and the possibility of a deficiency judgment. This is sometimes known as a friendly foreclosure because it is accomplished by agreement rather than by civil action.

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37
Q

What are the disadvantages of a Deed in Lieu Foreclosure?

A

The major disadvantage to this manner of default settlement is that the mortgagee takes the real estate subject to all junior liens; foreclosure eliminates all such liens. Significant tax issues can arise when a deed in lieu of foreclosure is used. Competent legal or tax advice always should be obtained.

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38
Q

Define a short sale?

A

is a transaction where the proceeds from the sale are not sufficient to fully satisfy the outstanding balance on the seller’s existing mortgage(s), and the borrower lacks sufficient funds to make up the shortfall.

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39
Q

Describe the Short Sale process?

A

A short sale is similar to a deed in lieu of foreclosure and occurs when a lender agrees to discount the remaining loan balance in the following manner: subject to the lender’s approval, the borrower sells the mortgaged property for less than the outstanding balance of the loan and cedes all of the proceeds to the lender in full satisfaction of any mortgage debt.

If the lienholder does not authorize the short sale, the seller cannot convey marketable title to a purchaser unless the seller can bring funds from another source to cover the shortfall.

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40
Q

When might a short sale occur and what could hold up this process?

A

As a practical matter, a lender will agree to a short sale only when convinced it will result in a smaller financial loss after factoring the cost and time of proceeding with a formal foreclosure. This may happen when the real estate market is a strong buyers’ market, when housing prices are on a steep decline, or when a lender for legal or practical reasons lacks the ability or desire to obtain a deficiency judgment.

However, keep in mind it is often possible for junior lienholders (such as second mortgages, tax liens, or mechanics liens) to prevent a short sale unless they receive guarantees that their interest will also be protected with the short sale.

Because there is no guarantee that the lienholder(s) will approve the terms of the sales contract, it is highly advisable that a short sale approval contingency be inserted into the contract to allow the seller to cancel the contract if the lienholders’ approval is not obtained, such as the North Carolina Association of REALTORS® Short Sale Addendum.

41
Q

A short sale workout arrangement will typically review factors that include the following:

A

Loan status: in default or default is imminent

Hardship: seller is facing hardship that is beyond the seller’s control that will adversely affect ability to make mortgage payments

Seller’s financial status: income documentation is generally required to determine if seller’s resources are insufficient to make up any shortage

Brokerage fee: any brokerage fee owed by the seller is considered

Possibility of loan fraud: workout request is reviewed for fraud especially if default occurs in the first 12 months of the loan term

Property value: loan servicer or lender will typically obtain an appraisal to evaluate the feasibility of the workout request; sometimes a broker price opinion (BPO) is requested instead of an appraisal

42
Q

The lienholder that participates in a short sale typically reserves the right to file suit against the borrower to acquire the shortfall, called a

A

deficiency

43
Q

When a person purchases real estate that is subject to an outstanding mortgage or deed of trust, the buyer may take the property in one of two ways. What are they?

A

The property may be purchased subject to the seller’s mortgage, or the buyer may assume the seller’s mortgage and agree to pay the debt. This technical distinction becomes important if the buyer defaults and the mortgage or deed of trust is foreclosed.

In contrast, a buyer who purchases the property and assumes the seller’s debt becomes personally obligated for the payment of the entire debt. After the assumption by the buyer, the seller is not automatically released from liability for the loan repayment. If the mortgage is foreclosed and the court sale does not bring enough money to pay the debt in full, a deficiency judgment against the assumptor and the original borrower may be obtained for the unpaid balance of the note. If the original borrower received a release from liability by the lender, only the assumptor is liable.

44
Q

What is The Promissory Note?

A

The promissory, or mortgage, note is legal evidence of the debt between the borrower and lender. A promissory note is a simple document that states the amount of the debt, the time and method of payment, and the rate of interest.

45
Q

What are the 3 essential pieces of a promissory note?

A

The essential elements of a note are (1) term, (2) promise to pay, and (3) signature of the borrower(s).

46
Q

Promissory Note Questions

1) Who should sign the promissory note?

2) Is the promissory note recorded?

3) How many copies should be signed?

A

The note, like the mortgage, should be signed by all parties who have an interest in the property (for example, both spouses should sign the note). Remember that (1) only the borrowers (makers) of the note sign it, (2) it is not recorded (only the security instrument is recorded), and (3) there is only one original that is signed at the closing (although there may be copies given to the various parties).

47
Q

What is a negotiable instrument?

A

A promissory note is usually a negotiable instrument—that is, a written promise or order to pay a specific sum of money.

An instrument is said to be negotiable when its holder, the payee, may transfer the right to receive payment to a third party. This may be accomplished by signing the instrument over to the third party or, in some cases, merely by delivering the instrument to that person.

Other examples of negotiable instruments include checks and bank drafts. It is important for the promissory note to be negotiable because lenders often sell their mortgage loans in the secondary mortgage market.

48
Q

To be negotiable, or freely transferable, an instrument must meet certain requirements of the law, what are they?

A

The instrument must be in writing

made by one person to another, and signed by the maker.

It must contain an unconditional promise to pay a sum of money on demand or at a set date in the future. In addition, the instrument must be payable to the order of a specifically named person or the bearer (whoever has possession of the note).

Instruments that are payable to order must be transferred by endorsement; those payable to bearer may be transferred by delivery.

A nonnegotiable note does not contain to order or to bearer but is payable to a named person. It is neither transferable nor assignable. The vast majority of real estate notes are negotiable, and therefore transferable.

49
Q

What are the 3 special note provisions?

A

Acceleration clause, Prepayment Penalty Clause, Due on Sale Clause

50
Q

What is an acceleration clause?

A

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 and costs) due and payable immediately, even though the terms of the mortgage originally allow the borrower to amortize the debt in regular payments over a period of years. Without the acceleration clause, the lender would have to sue the borrower every time a payment became due and in default (late).

51
Q

Why does Prepayment Penalty Clause exist?

A

When a loan is paid in installments over a long term, the total interest paid by the borrower can exceed the principal of the loan. If such a loan is paid off before its full term, the lender collects less interest from the borrower.

For this reason, some lenders include a prepayment penalty clause in the promissory note, requiring that the borrower pay a prepayment penalty against the unearned portion of the interest for any payments made ahead of schedule

52
Q

A loan that does not have a prepayment penalty clause will include a ________________, which allows the borrower to prepay a portion or all of the outstanding balance without penalty.

A

prepayment privilege clause

53
Q

Lenders in North Carolina are not permitted to charge a prepayment penalty on any residential loan with an original balance of 1) _____________ or less that is the first lien on the borrower’s __________.

A

1) 150,000 or less

2) Primary residence

54
Q

Federal law prohibits lenders from charging a prepayment penalty on which loans?

A

FHA-insured VA-guaranteed loan.

55
Q

Due-on-sale

1) What is the Due-On-Sale Clause and when might it be used?

2) What does the use of this clause trigger? And what does the absence of this clause mean?

A

1) Frequently, when a conventional real estate loan is made, the lender wishes to prevent some future purchaser of the property from being able to assume that loan without the lender’s permission, particularly at its original rate of interest.

For this reason, some lenders include a due-on-sale clause, also known as an alienation clause, in the note. A due-on-sale clause 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.

2) Use of this clause triggers the acceleration clause. The absence of a due-on-sale clause would permit a loan assumption without the lender’s prior consent.

56
Q

A short sale occurs when a property owner does not make his scheduled loan payments on time. (T/F)

A

False

A short sale occurs when a property is sold for less than the amount owed on it. A short sale does not necessarily involve delinquent payments.

57
Q

1) What is interest?

2) What type of interest is real estate interest?

A

1) A charge for the use of borrowed money.

2) Note that the interest charged on real estate loans is simple interest, and it is charged only on the outstanding loan balance

58
Q

What are amortized loans?

A

as regular level payments are made, each payment is broken down and applied first to the interest owed, with the rest of the payment applied to the principal amount—over a term of perhaps 15 years or 30 years. At the end of the term, the full amount of the principal and all interest due is reduced to zero.

**Most mortgage loans

59
Q

What are Direct Reduction Loans?

A

mortgage loans require a fixed amount of principal to be paid in each payment with the amount applied to interest varying as the balance is reduced

60
Q

What does PITI stand for?

A

Principal
Interest
Taxes
Insurance

61
Q

What happens to the taxes and insurance (TI) portion of PITI?

A

The taxes and insurance portion (TI) of the monthly payment is placed into the lender’s escrow account and held until those bills are due.

The lender receives the tax and insurance bills and pays those items from its escrow account on behalf of the borrower

62
Q

What is a Fully Amortized Fixed-Rate Mortgage?

A

The fully amortized fixed-rate mortgage requires that the mortgagor pay a constant amount, usually monthly, that will completely pay off the loan amount with the last equal payment.

The mortgagee first credits each payment to the interest due and then applies the balance to reduce the principal of the loan.

Therefore, while each debt service payment remains the same, the portion applied toward repayment of the principal grows and the interest due declines as the unpaid balance of the loan is reduced

**The most popular repayment plan. This may also be referred to as a level-payment, simple interest loan

63
Q

Partially Amortized Fixed-Rate Mortgage

A

With a partially amortized loan, the monthly principal and interest 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.

64
Q

What is a ballon payment?

A

A balloon payment is a payment of an amount that is larger than the previous regular payments.

65
Q

What is simple interest?

A

Lenders charge borrowers a certain percentage of the principal as interest for each year a debt is outstanding

The amount of interest due in a particular payment is calculated by computing the total yearly interest based on the unpaid balance and dividing that figure by the number of payments made each year

66
Q

A mortgage loan is often described based on its. _____________

A

loan-to-value ratio (LTV) which is the ratio of debt to value of the property. Value is the sales price or the appraised value, whichever is less. The lower the ratio of debt to value, the higher the down payment by the borrower will be.

67
Q

What creates a more secure loan for a lender?

A

For the lender, the higher down payment means a more secure loan, which minimizes the lender’s risk. For instance, if a property is worth $100,000, an 80% loan would equal $80,000, and the borrower would make a $20,000 down payment

68
Q

State Usury Laws

A

The maximum rate of interest legally charged on loans may be set by ________________

69
Q

What is usury?

A

Charging interest in excess of this rate

70
Q

Why are usury laws in place?

A

Usury laws were enacted primarily to protect consumers from unscrupulous lenders that charge unreasonably high interest rates.

In some states, a lender that makes a usurious loan is permitted to collect the borrowed money, but only at the legal rate of interest. In other states, a usurious lender may lose the right to collect any interest or may lose the entire amount of the loan in addition to the interest. Loans made to corporations are generally exempt from usury laws.

71
Q

Depository Institutions Deregulation and Monetary Control Act of 1980

A

specifically exempted from state interest limitations all federally-related residential first mortgage loans made after March 31, 1980. This Act was passed to continue the availability of mortgage loans in the early 1980s when interest rates hit 18% while most state usury limits were below that rate.

Federally related loans are those made by federally chartered institutions or those insured or guaranteed by a federal agency.

The exemption includes loans used to finance manufactured housing (the federal term for mobile homes) and the acquisition of stock in a cooperative housing corporation. North Carolina exempts all residential first deeds of trust from state usury laws.

72
Q

What is yield?

A

The return or profit on a loan

73
Q

How does yield and discount points work?

A

A large part of the yield comes from the interest rate the lender charges on the loan. However, the rate of interest that a lender charges for a mortgage loan might be less than the rate of return required by the lender or by an investor who might purchase that loan from the lender.

For this reason, the lender can charge discount points to make up the difference between the mortgage interest rate and the required investor yield.

The number of points charged varies, depending on the difference between the interest rate and the required yield and on the average time the lender expects the loan to be outstanding.

Lenders calculate that it takes an average of six to eight discount points to increase the yield 1%, with eight points being the rule of thumb; therefore, it is said that one point will increase the yield about one-eighth percent.

Points can be charged on FHA-insured, VA-guaranteed, and conventional loans.

74
Q

What are loan origination fees?

A

are not prepaid interest; they are an expense that must be paid to the lender, typically 1% of the loan amount regardless of any discount points that might also be charged.

75
Q

Amortization (debt liquidation)

A

Amortization is the process of paying off a home loan by making periodic (usually monthly) payments of principal (P) and interest (I), called debt service. Amortization literally means to kill the debt. A monthly PI payment can be easily computed by using a mortgage payment constant chart (amortization chart).

The chart is based on a $1,000 loan. The interest rate and the term dictate the loan factor, which is the monthly P&I amount in dollars needed to amortize a $1,000 loan.

76
Q

How does Principal, interest, taxes, insurance (PITI) borrowing work?

A

The borrower will probably be required by the lender to place into escrow 1/12 of the annual property taxes and one-twelfth of the homeowners annual insurance premium each month. The PITI can be computed by adding monthly debt service (principal and interest) to the tax and insurance monthly escrow payments.

77
Q

Total interest paid over the life of the loan

A

On a fixed-rate mortgage loan, the monthly PI payment remains constant. Multiply the monthly PI payment by the number of payments made over the life of the loan and subtract the original principal to find the total interest paid.

78
Q

Mortgage debt reduction (amortization)

A

The monthly PI payment will do two things. The principal portion will reduce the debt by the amount of monthly principal paid, and the interest portion will supply the lender’s yield on the loan.

79
Q

Loan origination fees, discount points, and assumption fees

A

Lenders charge various fees to the borrower when processing a loan application. The origination fee is normally 1% of the loan amount, and discount points (previously discussed) may be charged to increase the yield. In the event of a loan assumption, the lender normally will charge an assumption fee, quoted as a percentage of the amount to be assumed.

80
Q

Interest-Only Mortgage (Term or Straight Loan)

1) What are they?

2) Some of the history with these loans

A

A mortgagor may choose an interest-only payment plan that calls for periodic payments of interest only, with the principal to be paid in full at the end of the loan term in a balloon payment. This is known as a term loan, or a straight loan

Prior to the 1930s, the only form of mortgage loan available was the straight-payment loan, payable in full after a relatively short term, such as three years to five years. The high rate of foreclosure on such loans in the depression years prompted the introduction and use of the more manageable long-term amortized loans that are now the norm.

The popularity of term loans in recent years as first mortgages for primary residences in combination with very low or no down payment requirements is thought to have contributed to the huge number of foreclosures currently being experienced.

81
Q

Adjustable-Rate Mortgage (ARM)

A

Adjustable-rate mortgages (ARMs) generally originate at one rate of interest, with the rate fluctuating up or down during the loan term based on the movement of a published index. Because the interest may change, so may the mortgagor’s loan payments.

Generally, interest rate adjustments are limited to one per period, and a maximum amount of increase or decrease may be made over the life of the loan. Certain regulations may enable a lender to adjust the interest rate on a monthly basis. The borrower is usually given the right to repay the loan in full without penalty whenever the interest rate changes.

illustrates the effect interest rate fluctuations and periodic caps have on an adjustable-rate mortgage

the borrower’s rate ranges from a low of 5.9% to a high of 9.5%

82
Q

Common components of an ARM (Adjustable-Rate Mortgage) include the following:

A

Note Rate (contract rate)
Index
Margin
Interest Rate Caps
Payment Caps
Adjustment Period
Conversion Period

83
Q

Note rate (contract rate)

A

The original rate charged, which is stated in the closing documents.

84
Q

Index

A

The interest rate on the outstanding balance of the loan is increased or decreased according to the movements of a named publicly published index.

A very popular index used by lending institutions is the short-term U.S. Treasury bill rate, but many other indices are available and used.

85
Q

margin

A

The amount of interest a lender charges over and above the index rate is called the margin.

For example, if the most recent one-year Treasury bill rate was 3.25%, the lender could add a 2% margin and charge the borrower a 5.25% interest rate on the outstanding loan balance.

The amount of the margin remains fixed for the entire life of the loan; it is the movement of the index rate that causes the ARM interest rate to fluctuate.

86
Q

Interest Rate Caps

A

Rate caps limit the amount the interest rate may increase or decrease in any one adjustment period, called the anniversary or periodic interest rate cap.

They also limit the amount the interest rate can increase over the entire life of the loan, which is called the lifetime or life of loan cap.

87
Q

Payment Cap

A

The payment cap, which sets a maximum amount for payment changes, protects the mortgagor against the possibility of individual payments that the mortgagor cannot afford. With a payment cap, a rate increase can result in negative amortization—an increase in the loan balance.

For instance, suppose a borrower’s rate increases a full 1%. For this borrower a 1% rate increase translates into a payment increase of $65 a month. However, the payment cap limits the increase to $45 a month. During that adjustment period, the borrower will be paying $20 a month less than the amount required to pay the full principal and interest payment. So, each month, $20 is added to the principal balance. This is negative amortization.

88
Q

Adjustment Period

A

This establishes how often the loan rate may change. Common adjustment periods are every year (a one-year ARM), every three years (a three-year ARM), and every five years (a five-year ARM), or some combination.

89
Q

Conversion Option

A

Lenders may offer a conversion option, which permits the mortgage to be converted from an adjustable-rate to a fixed-rate loan at certain intervals during the life of the mortgage. The option is subject to certain terms and conditions for the conversion.

90
Q

Adjustment Period

A

This establishes how often the loan rate may change. Common adjustment periods are every year (a one-year ARM), every three years (a three-year ARM), and every five years (a five-year ARM), or some combination.

91
Q

Conversion Option

A

Lenders may offer a conversion option, which permits the mortgage to be converted from an adjustable-rate to a fixed-rate loan at certain intervals during the life of the mortgage. The option is subject to certain terms and conditions for the conversion

92
Q

graduated payment mortgage (GPM)

1) what is it?

2) What happens as each payment is made?

3) When is this type of loan generally used?

A

allows a mortgagor to make lower monthly payments for the first few years of the loan (typically the first five years) and larger payments for the remainder of the term, when the mortgagor’s income is expected to have increased. The interest on a GPM is fixed throughout the life of the loan. However, in the early years of the loan, the monthly payments are lower than the payments required to fully amortize the loan. This results in negative amortization.

As each payment is made, the unpaid interest is added to the principal balance, resulting in an increasing loan balance for the first few years. The monthly payments then increase at stated intervals throughout the loan term, eventually making up for the negative amortization and paying off the loan in full by the end of the loan term.

Generally, this type of loan is used to enable first-time buyers and buyers in times of high interest rates to purchase real estate.

93
Q

Balloon Payment Loan

1) What is a ballon payment loan?

2) What may the lender do but is not obligated to do in a ballon payment situation?

3) What type of loan is this? Who often uses it?

A

When a mortgage loan requires periodic payments that will not fully amortize the amount of the loan by the end of the loan term, the final payment is an amount that is larger than the previous payments

It is frequently assumed that if payments are made promptly, the lender will extend the balloon payment for another limited term. The lender, however, is in no way legally obligated to grant this extension and can require payment in full when the note is due.

A loan that requires a balloon payment is called a partially amortized loan and is quite common in seller-financing situations. When sellers finance part or all of the purchase price, they often want to be cashed out—that is, have the seller financing paid off—within three to five years of the sale

94
Q

Growing-Equity Mortgage (GEM)

A

The growing-equity mortgage, or rapid-payoff mortgage, makes use of a fixed interest rate, but payments of principal are increased according to an index or a schedule. The total payment, therefore, increases, but the borrower’s income is expected to keep pace, and the loan is paid off more quickly.

95
Q

Balloon payment loans are also known as partially amortized loans (T/F)

A

True

Balloon payment loans require periodical payments that will fully amortize the amount of the loan by the end of the term, so the final payment is larger than previous payments (a balloon payment). That is why this loan is also described as a partially amortized loan.

96
Q

simple interest formula

A

I = P x R x T

97
Q

Using the customary loan origination fee (LOF), the charge for this expense on an 80% LTV loan of $100,000 is $1,000. (T/F)

A

False

$100,000 loan × 80% LTV = $80,000 loan × 1% loan origination fee = $800 LOF.

98
Q

In an assumption of a mortgage, the previous borrower is no longer responsible for the payment of the debt. (T/F)

A

False

In an assumption of the mortgage, the previous borrower remains responsible for the debt if the new borrower does not make the promised loan payments