CHAPTER FOUR: PROMISSORY NOTE

Question 1

___ note- Following a loan commitment from the lender, the borrower signs a note, promising to repay the loan under stipulated terms. The promissory note establishes personal liability for its payment. The evidence of the debt.

-legally binding

-

Answer 1

Promissory Note

Question 2

___ loans- these loans are backed by collateral. For ex: with home buying, collateral is general the home itself. The loan is based on the value of the home and the home protects the lender. Should a borrower default, the home becomes accessibe to the lender to seize to repay what is owed. Most home loans are these loans.

Answer 2

secured loans

Question 3

____ loans- ex: a credit card or personal loan. It’s given based on the personal credit history and financial security of an individual. Rarely used in home loans.

Answer 3

unsecured loan

Question 4

____- 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.

Answer 4

Interest

Question 5

On a loan, claiming a rate of interest greater than that permitted by law.

Usury laws- limits on how much banks can charge.

Answer 5

Usury

Question 6

___ points- The amount of money the borrower or seller must pay the lender to get a mortgage at a stated interest rate.

• paying 1 discount point is the same as paying 1% of the loan amount.
• referred to as buying down the rate.

Answer 6

Discount Points

Question 7

___ ___ fees- a fee that is charged by the lender on a home loan. The fee is usually between 0.05 and 1% of the amount of the home loan obtained to purchase the loan. It pays for

• paperwork
• verifications
• calculations that are done to determine the loan rate and terms.

Answer 7

Loan Origination Fees

Question 8

A statement to find out what is anticipated as the loan origination fee is called a ___ ____ statement

Answer 8

good faith

Question 9

_____ clause- is a line in the contract they sign with their lender (within the promissory note) that states a penalty will be paid if the mortgage is paid off within a certain time frame.

Answer 9

Prepayment Clause

Question 10

____ penalty- The charge payable to a lender by a borrower under the terms of the loan agreement if the borrower pays off the outstanding principal balance of the loan prior to its maturity.

Answer 10

Prepayment Penalty

Question 11

____ note- A note in which a borrower repays the principal in a lump sum at maturity while interest is paid in installments or at maturity.

• good for those who are unlikely to remain in their home for a long time.

Answer 11

Straight Note

Question 12

____- The liquidation of a financial obligation on an installment basis.

• most home loans are fully amortized.

Answer 12

Amortization

Question 13

____ loan- A loan to be repaid, interest and principal, by a series of regular payments that are equal or nearly equal, without any special balloon payment prior to maturity.

• pays mainly interest at first, then the principle at the end.

Answer 13

Amortized Loan

Question 14

Partial ____- the interest is paid during the loan term and the principal is paid at the end. - like the interest only loan.

____ ___ loan- A straight, non-amortizing loan in which the lender receives only interest during the term of the loan and principal is repaid in a lump sum at maturity.

Answer 14

amortized -

Interest Only Loan

balloon payments at the end

Question 15

___- The right reserved by the lender to increase the amount of the payments and/or interest upon the happening of a certain event.

Answer 15

Escalation

Question 16

____ clause- this is a statement added to a promissory note that says that the lender can decrease or increase the interest rate of the note with given notive.

Answer 16

Escalator clause

Question 17

___ clause- A condition in a real estate finance instrument giving the lender the power to declare all sums owing the lender immediately due and payable upon the happening of an event, such as sale of the property, or a delinquency in the repayment of the note.

-generally due to a breach in contract or homeowner doesn’t pay or maintain insurance on the home.

Answer 17

Acceleration Clause