CHP 15 - Real Estate Finance

Question 1

Financing instrument that creates a lien against a property

Answer 1

Mortgage

Question 2

Promissory Note

Answer 2

Describes the amount of money borrowed, terms and conditions.

Question 3

If a person takes title to a property “subject to” the mortgage

Answer 3

The person is not personally liable to lender, seller is.

Question 4

Straight (Interest Only)

Answer 4

Monthly payments all go towards interest. Buyer must pay entire principal or get another loan

Question 5

Amortized

Answer 5

Principal + Interest - monthly

Question 6

Fully Amortized Loan

Answer 6

Same payment each month

Question 7

Straight amortized loan

Answer 7

Differen tamount with each payment. Fixed principal and, interest varies

Question 8

Balloon Mortgage

Answer 8

One large final payment - this is a partially amortized loan

Question 9

Adjustable Rate Mortgage (ARM)

Answer 9

Better when interest rates are high. 1980’s

Question 10

Index

Answer 10

Measure of economic conditions (use as starting point for calculation)

Question 11

Margin

Answer 11

Usually between 2-3%. THis is added to the index to set interest rate

Question 12

Most common adjustment periods

Answer 12

3-5 years

Question 13

Other names for interest rate caps

Answer 13

rate caps
ceilings
lifetime caps

Question 14

Whats the 1st interest rate cap

Answer 14

The periodic cap - sets teh amoutn of increase or decrease allowed each period

Question 15

What’s the 2nd interest rate cap

Answer 15

Overall/Aggregate Cap sets a max interest rate increase over life of loan

Question 16

Payment Cap

Answer 16

ensures a set monthly payment

Question 17

Negative Amortization Cap

Answer 17

Limits unpaid interest that lender can add to principal balance

Question 18

2 Types of Mortgages

Answer 18

Conventional

Government-Backed

Question 19

Gov’t Backed Loans

Answer 19

FHA
DVA
RHS

Question 20

Benefits to conventional loans

Answer 20

less time
fewer forms
no legal limit on loan amount
lenders are more flexible

Question 21

Disadvantages to conventional

Answer 21

higher down pymt

prepay penalties

Question 22

2 Features of fixed rate fully amortized

Answer 22

1. interest rate fixed for life

2. The pymnts remain level for life of loan

Question 23

2 ways to avoid PMI

Answer 23

1) Lender Paid Mortgage Insurance

2) 80-10-10 (1st, 2nd, down pymnt)

Question 24

Downfall to a straight loan

Answer 24

Interest only

Question 25

What kinds of limits are placed on interest rate in ARM

Answer 25

caps limit amount of interest borrower can be charged. Periodic caps limit amount rate can change over time

Question 26

Law on PMI

Answer 26

Must terminate after 22% equity (78% Loan-to-Value ratio) and current with payments BUT borrower can request cancellation at 20%

Question 27

When is a bridge loan used

Answer 27

1) To cover time b/t end of loan and beginning of another | 2) To borrow money on an unsold home when seller won't accept property sale contingency

Question 28

Purchase Money Mortgage

Answer 28

Buyer borrows from seller in addition to lender

Question 29

Package Mortgage

Answer 29

Includes all personal property and appliances - used in condo sales

Question 30

Shared Equity Mortgage

Answer 30

Lender shares in appreciation if and when the property sales

Question 31

A Builder offers $5K closing cost as an incentive; what type of mortgage is this

Answer 31

Buydown

Question 32

What's a release clause and what mortgage has it

Answer 32

Blanket mortgage - Allows for release of individual lots

Question 33

Reverse Annuity

Answer 33

Lender makes payment to borrower on equity

Question 34

FHA Loan characteristics

Answer 34

1) Either fixed 10-30 or one year adjustable 2) Max loan term in 30 yrs or 75% of remaining economic life whichever is less 3) Down payments are low (Buyer must have cash down payment and closing costs) 4) Max loan fee is 1% of loan amount, typically paid by buyer

Question 35

Two Insurance premiums

Answer 35

MIP (Mortage Ins. Pre) | MMI (Mutual Morgage Ins.)

Question 36

FHA does NOT....

Answer 36

loan funds, they insure bank backed loans

Question 37

Certificate of Reasonable Value (CRV)

Answer 37

value of property in relation to sales price

Question 38

GPM Graduated Pymt Mortgage

Answer 38

Monthly pymnt increases each yr and then levels

Question 39

PAM (Pledged Acct Mortgage)

Answer 39

Borrower contributes a sum into an account pledged to lender

Question 40

Open End Loan

Answer 40

Expandable loan giving borrow a limit

Question 41

Allows borrow to take a second loan without paying off the first

Answer 41

Wraparound Mortgage