LESSON 7: LOAN TYPES, TERMS, ISSUES Flashcards
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What is amortization?
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The process of paying off debt over time through regular principal and interest payments.
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What does an amortization schedule show?
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A breakdown of loan payments, showing how much goes toward principal and interest each month.
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How does an amortizing loan work?
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Each payment includes interest and principal, with early payments covering more interest and later payments covering more principal.
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How can amortization be calculated?
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Using financial calculators, spreadsheet software (like Excel), or online amortization calculators.
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What is the benefit of a level amortizing loan?
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The borrower knows the monthly payment and interest rate will remain the same throughout the loan term.
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What is the difference between amortization and depreciation?
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Amortization applies to intangible assets (like patents), while depreciation applies to tangible assets (like buildings and equipment).
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How is the interest portion of a mortgage payment calculated?
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Multiply the principal balance by the annual interest rate, then divide by 12 to get the monthly interest amount.
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How can extra payments on a mortgage impact amortization?
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Extra payments reduce the principal faster, lowering the total interest paid and shortening the loan term.
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What happens if you pay biweekly instead of monthly?
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You pay off the loan faster and save on interest, as biweekly payments result in an extra full payment each year.
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What are the two main parts of a mortgage payment?
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Principal (amount borrowed) and interest (cost of borrowing).
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What additional costs may be included in a mortgage payment?
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Property taxes and homeowners insurance, often paid through escrow.
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What happens to the allocation of principal and interest over time?
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At the beginning, more of the payment goes to interest, but over time, more goes toward principal.
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What is the Loan-to-Value (LTV) ratio?
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The ratio of the loan amount to the property’s sales price (e.g., an $80,000 loan on a $100,000 house = 80% LTV).
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What is the difference between government and conventional loans?
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Government loans (FHA, VA) are backed by the government, while conventional loans are not.
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When is private mortgage insurance (PMI) required?
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When the LTV exceeds 80% (i.e., when the borrower makes a down payment of less than 20%).
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Why do people refinance their homes?
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To take advantage of lower interest rates, access home equity, or reduce monthly payments.
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What is the basic formula for calculating interest?
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Principal × Annual Interest Rate = Annual Interest Amount.
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How does the loan term affect monthly payments?
Longer loan terms result in lower monthly payments but more interest paid over time.
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What index do Fannie Mae ARMs use?
Fannie Mae ARMs use the London Interbank Offered Rate (LIBOR), available from Fannie Mae or the Wall Street Journal, as their index.
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What are float-to-fixed rate loans?
Loans that start with a floating interest rate, then convert to a fixed rate after a set period (typically 1-2 years).
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What is a hybrid ARM?
A type of adjustable-rate mortgage that has features of both fixed and variable interest rate loans. A variant is the fixed-to-float rate hybrid ARM.
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What is an 80-10-10 piggyback loan?
A mortgage structure that consists of two loans: one for 80% of the sale price at a market rate and a second for 10% at a higher rate, avoiding private mortgage insurance (PMI).
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What is a key advantage of an 80-10-10 loan?
It avoids PMI, and interest on the second loan may be tax-deductible.
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What is a downside of an 80-10-10 loan?
Unlike PMI, the second loan must be fully repaid and does not get canceled when reaching 20% equity.
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What is a Graduated Payment Mortgage (GPM)?
A loan with low initial payments that increase at set intervals before stabilizing at a fixed amount.
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What are the risks of a GPM?
Higher overall cost due to slow principal reduction, complexity, potential for negative amortization, and reliance on future income growth.
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What is negative amortization in a GPM?
When initial payments do not cover all interest due, causing the unpaid interest to be added to the principal, increasing the loan balance.
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What are the FHA requirements for a GPM?
A minimum 3.5% down payment, FHA mortgage insurance premiums, and the loan must be for a single-unit, owner-occupied property.
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What is a Growth Equity Mortgage (GEM)?
A mortgage with increasing payments where all increases go toward reducing principal, allowing faster payoff.
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How does a GEM differ from an ARM?
In a GEM, the interest rate remains fixed while the principal payment increases over time, whereas an ARM has an interest rate that adjusts.
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What is a balloon mortgage?
A short-term loan (e.g., 5-7 years) with payments based on a longer-term amortization schedule, requiring a lump sum or refinancing at the end.
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What is the appeal of a balloon mortgage?
It offers lower interest rates and lower initial payments, making it attractive for short-term homeowners or those expecting higher future income.
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What is a 7/23 convertible mortgage?
A seven-year balloon mortgage from Fannie Mae that allows conversion into a 23-year fixed-rate mortgage at the end of the initial term.
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What are the characteristics of a reverse mortgage?
A loan for homeowners 62+, with no monthly payments, but accumulating interest that reduces home equity over time.
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What are key risks of a reverse mortgage?
High upfront fees, growing loan balance, requirement to stay in the home, and potential for heirs to inherit less equity.
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What is a blanket mortgage?
A mortgage covering multiple properties, allowing individual properties to be sold without paying off the entire mortgage.
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What is a release clause in a blanket mortgage?
A provision allowing parcels to be released from the mortgage when certain repayment milestones are met.
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What is a recognition clause in a blanket mortgage?
A clause ensuring homebuyers' rights are recognized if the developer's lender forecloses on the mortgage.
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What is an open-end mortgage?
An open-end mortgage allows the mortgagor to borrow additional funds later on top of the original loan amount.
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How does an open-end mortgage benefit borrowers?
It enables borrowers to access extra funds without refinancing, though monthly payments or loan terms may increase.
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Is an open-end mortgage the same as a HELOC?
No, a HELOC is a second lien with flexible withdrawals, while an open-end mortgage is a single mortgage with possible restrictions on withdrawals.
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What is a construction mortgage?
A loan where the lender pays funds in installments (draws) as construction progresses, typically covering 75% of the final property value.
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How is a construction mortgage repaid?
The total loan amount plus interest is due upon construction completion, usually replaced by a long-term mortgage.
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What is a sale-leaseback?
A real estate transaction where an owner sells property and leases it back, commonly used by commercial investors.
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Why is a sale-leaseback beneficial for the buyer?
The buyer receives rental income and can profit from reselling at a new market price.
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What is a permanent buydown mortgage?
A loan where the borrower pays discount points upfront to lower the interest rate, either as cash or by financing it.
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How does a financed permanent buydown help borrowers?
It reduces monthly mortgage payments without requiring an upfront lump sum.
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What are the downsides of financing discount points?
It can be more costly in the long term unless the borrower is in a low tax bracket or earning a high return on investments.
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What is a temporary buydown mortgage?
A loan with initially reduced interest rates, subsidized by a fund, which increases gradually until reaching the fixed rate.
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What are the advantages of a temporary buydown?
Low initial payments and easier borrower qualification.
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What are the disadvantages of a temporary buydown?
Requires a large upfront payment, and monthly payments will eventually increase.
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How do Freddie Mac and Fannie Mae differ in temporary buydown requirements?
Freddie Mac allows 2-1 and 3-2-1 buydowns, while Fannie Mae requires the buydown period not exceed 36 months with gradual increases.
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How is a temporary buydown funded?
A lump sum is deposited in an escrow account by a borrower, seller, builder, or another party.
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What is the FHA 203(k) Property Rehabilitation Program?
A government loan that finances both the acquisition and renovation of a property with a low down payment.
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How does the FHA 203(k) loan benefit lenders?
Lenders can insure the loan even before the property’s condition and value provide adequate security.
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What is an equity participation mortgage?
A loan where the lender shares in property income or resale profits, commonly used in commercial real estate.
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What is the advantage of a participation mortgage?
Borrowers receive lower interest rates, while lenders benefit from income and resale profits.
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What is a drawback of a participation mortgage for lenders?
Lenders must monitor cash flow to prevent underreported revenue or poor property maintenance.
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What is seller financing?
A transaction where the seller provides financing instead of a traditional lender, taking a secured note in the form of a mortgage or deed of trust.
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How can seller financing be structured?
1) The seller acts as the lender if they own the property outright, or 2) The buyer assumes an existing loan and the seller finances the remaining equity as a second lien.
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What is a risk of seller financing?
Payments may not be reported to credit bureaus, and defaulting can lead to legal action or debt collection.
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What is a jumbo loan?
A loan that exceeds the FNMA limit and cannot be sold to Fannie Mae.
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What is an alternative loan?
A non-traditional loan with relaxed underwriting guidelines, often carrying higher interest rates.
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What is the partnership structure for SBA loans?
Small Business Loans (SBA) are a partnership between a bank or mortgage company and the federal government. The government provides up to 40% of the sales price, and the bank provides up to 50%, allowing the purchase with only 10% down. SBA loans are for retail or commercial real estate, not for residential real estate or the purchase of a business.
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What is a Participation Agreement in SBA loans?
A Participation Agreement is an agreement where a group of lending institutions agree to fund a specific amount of a loan. One institution becomes the lead bank, and the agreement outlines the order of payment in case of foreclosure.
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What are the main benefits of SBA-guaranteed loans?
Benefits include competitive terms (rates and fees), counseling and education for businesses, lower down payments, flexible overhead requirements, and no collateral for some loans.
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How can you avoid predatory lenders when applying for SBA loans?
Look out for high-interest rates, excessive fees, and lack of transparency. Always check for the APR and payment schedule, never leave signature boxes blank, and don't let lenders pressure you into taking the loan.
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What are the general eligibility requirements for SBA loans?
Eligibility depends on the business's income source, ownership character, and location. Businesses must meet SBA size standards, be able to repay, and have a sound business purpose. Even those with bad credit may qualify for startup funding.
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What is the role of SBA in assisting businesses?
SBA was created in 1953 to aid, counsel, assist, and protect small businesses, preserve competitive enterprise, and strengthen the overall economy. SBA provides support in management, financial help, federal contracts, and outreach to women, minorities, and veterans. SBA also helps disaster victims and offers international trade advice.
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What are the characteristics of a conventional mortgage?
A conventional mortgage is not government-backed and is subject to lender terms. Characteristics include loan terms of 10 to 40 years, LTV ratios up to 80% without mortgage insurance, due-on-sale clauses, and insurance requirements. Some conventional loans may have prepayment penalties, but the borrower can usually pay off 20% of the balance annually without penalty.
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What is the significance of a "due-on-sale" clause in conventional mortgages?
A "due-on-sale" clause limits the right to assume a loan without the lender's consent.
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How can a Reverse Mortgage be used?
A Reverse Mortgage allows homeowners over 62 to take cash out of their property, eliminate payments, or set up an annuity. It can also be used for purchasing property by borrowing funds with no payments.
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What is the major difference between a conventional loan and an SBA loan?
Conventional loans are not guaranteed or insured by a government agency, whereas SBA loans are government-backed. SBA loans typically have lower down payments and may offer more flexibility than conventional loans.
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What are the down payment requirements for a conventional mortgage?
For first-time homebuyers, a conventional loan can require as little as 3% down. Other cases may require 5%, 10%, or 15% depending on the property type and buyer status. Refinancing requires at least 5% equity, and a cash-out refinance requires at least 20% equity.
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What is Private Mortgage Insurance (PMI) and when is it required?
PMI is required when a conventional loan has less than 20% down. It protects the lender if the borrower defaults. PMI can be included in the monthly payment, paid upfront, or added as a higher interest rate. PMI can be removed once 20% equity in the property is reached.
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How is PMI calculated?
PMI is calculated as a percentage of the loan amount. For example, with 10% down on a $200,000 loan, the PMI would be 0.52% ($1,040 annually), or $86.67/month. For 5% down, the PMI is 0.75%, and for 3% down, it is 0.90%.
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When can PMI be removed from a loan?
PMI can be removed once the borrower reaches at least 20% equity, and the loan is at least two years old with no late payments in the past year. An appraisal may be required.
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What is a Jumbo Loan?
A Jumbo Loan exceeds the FNMA maximum loan size, currently $510,400 for single-family homes. These loans are non-conforming and typically carry higher interest rates, stricter underwriting rules, and larger down payments.
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What are the different tiers of Jumbo Loans?
1. First tier: Loans from $510,400 to $726,525, with standard down payment and interest rates. 2. Second tier: Loans from $620,200 to $930,300, requiring higher down payments and interest rates. 3. Third tier: Loans above $1,000,000 with higher down payments and may require two appraisals.
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What are the qualifications for Jumbo Loans?
Jumbo loans require larger down payments (typically 20-35%), a higher DTI ratio, and sometimes multiple appraisals. They may have slightly higher interest rates but offer competitive terms based on the lender and market conditions.
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What is the role of nonbank mortgage lenders?
Nonbank mortgage lenders provide services like mortgage lending and refinancing without the regulations traditional banks face. They can offer lower down payments, more flexible rates, and faster approvals, as they don't hold deposits but fund loans by selling mortgages to investors.
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What are Alternative Loans (Alt-A)?
Alternative loans, also known as Alt-A loans, are for borrowers with good credit who don't meet all standard underwriting guidelines. These include stated income loans, no ratio loans, and no-doc loans.
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What is the difference between a Stated Income Loan and a No-Doc Loan?
A Stated Income Loan allows borrowers to state their income without documentation, while a No-Doc Loan does not require income or employment details, only credit and property appraisal.
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How have nonbank lenders grown after the 2008 financial crisis?
Nonbank lenders have filled the gap left by traditional banks by offering digital solutions and more flexible loan options. These lenders target underserved individuals, particularly low-to-moderate-income, minority, and veteran borrowers.
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What is the purpose of Mortgage Insurance?
Mortgage insurance enables lenders to close loans with small down payments, typically when the down payment is less than 20%. It benefits the lender in case of default or foreclosure, as it pays the loss suffered by the lender.
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Who benefits from Mortgage Insurance?
Mortgage insurance is strictly for the benefit of the lender, though it allows the buyer to purchase a home with a smaller down payment.
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When is Mortgage Insurance typically required?
It is typically required when the down payment for a purchase is less than 20%.
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What happens if the borrower defaults or the property is foreclosed on?
If the borrower defaults or the property is foreclosed, the mortgage insurance company pays the loss suffered by the lender. The mortgage insurance company may attempt to recover the loss from the borrower by filing for a deficiency judgment.
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Who provides Mortgage Insurance?
Mortgage insurance is provided by both government agencies, such as FHA, and private insurance companies.
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What is the difference between FHA Mortgage Insurance and Private Mortgage Insurance (PMI)?
FHA Mortgage Insurance is called Mortgage Insurance Premium (MIP) and is collected for all loans insured by the FHA, while PMI typically applies to conventional loans. MIP includes an upfront charge and monthly payments, whereas PMI only includes monthly payments.
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What does FHA Mortgage Insurance Premium (MIP) include?
MIP includes an upfront charge of 1.5% of the loan amount (UFMIP) and an annual fee of 0.5% of the loan amount, which is collected monthly.
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When can the MIP be removed?
The MIP cannot be removed until the loan balance reaches 80% of the original sales price. FHA does not account for appreciation in loan-to-value calculations.
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What is refinancing?
Refinancing is the process of revising the terms of an existing credit agreement, typically to secure a lower interest rate, better payment schedule, or other favorable changes.
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Why do borrowers refinance?
Borrowers typically refinance to take advantage of lower interest rates or to improve their financial situation.
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What is the typical process for refinancing?
The borrower applies to their existing lender or a new lender, undergoes re-evaluation of their financial situation, and, if approved, receives a new loan contract to replace the original.
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What costs are associated with refinancing?
Refinancing costs can include title insurance, credit checks, surveys, inspections, and other fees, even if the refinance is advertised as low or no-cost.
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What should be considered before refinancing?
Borrowers should evaluate the time it takes to recover the costs of refinancing and compare this with the savings from a new loan. A common rule of thumb is refinancing is worth it if the new interest rate is 2% lower than the old one.
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How do participation agreements work in mortgage lending?
A participation agreement is between a lead lender and a participant, where the participant purchases an interest in the underlying loan. The lead lender manages the loan and communicates with the borrower. The participant can only request reimbursement from the lead lender, not from the borrower directly.
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What is the role of the lead lender in a participation agreement?
The lead lender originates the loan, communicates with the borrower, and manages all servicing and foreclosure responsibilities.
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What are the risks associated with participation loans?
Risks include potential complications if the borrower defaults, the possibility of not being able to recover funds from the borrower, and the need for effective collaboration between the lead lender and participants.
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What is a subprime mortgage?
A subprime mortgage is offered to borrowers with lower credit ratings and has a higher interest rate due to the increased risk of default.
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How do Adjustable Rate Mortgages (ARMs) work?
ARMs typically offer a low interest rate for the first few years (2–3 years), after which the rate resets based on a benchmark like LIBOR, often resulting in a higher rate.
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What is predatory lending?
Predatory lending involves unfair, deceptive, or fraudulent practices, such as tricking borrowers into loans with terms they can't afford or that have hidden high costs, leading to default and foreclosure.
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Why is predatory lending a concern for real estate professionals?
Predatory lending can result in buyers facing foreclosure, and real estate professionals need to scrutinize such loans carefully to protect their clients.
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What does a loan participation agreement involve?
A loan participation agreement allows a lender (lead lender) to sell an interest in a loan to a participant. The lead lender retains control of the loan and handles all interactions with the borrower, including servicing and foreclosure.
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What are the benefits for a lender when selling loan participation interests?
Selling participation interests allows the lender to improve liquidity, mitigate risk, and access further funding opportunities.
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How does the participation agreement protect participants?
The agreement clearly defines the roles and obligations of the lead lender and the participants, including rights in case of borrower default and the participant's share of expenses.
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What tax decision do new homeowners need to make?
New homeowners need to decide whether to take itemized deductions or the standard deduction. The standard deduction often exceeds the amount of itemized deductions.
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What is the mortgage interest deduction?
The mortgage interest deduction allows homeowners to deduct mortgage interest, including PMI payments, if they itemize deductions.
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Can everyone itemize deductions?
Not everyone qualifies to itemize deductions. The 2017 tax reform changed this, making it harder for many to itemize.
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What penalties exist for repaying a mortgage early?
There may be penalties for repaying a mortgage early, such as prepayment penalties.
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Can ground rent be deducted?
Yes, if the ground rent is redeemable and meets certain qualifications.
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What is the treatment of cooperative apartment loan interest?
A loan used to buy into a cooperative housing corporation is treated like a mortgage and its interest is deductible.
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What can investors deduct that homeowners cannot?
Investors can deduct interest on loans for investment properties, unlike homeowners.
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What are some deductible costs of owning a home?
Deductions include mortgage interest, mortgage points, and late charges on mortgage payments.
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What is the "2 percent limit" in investment deductions?
Investment expenses must exceed 2% of your Adjusted Gross Income (AGI) to be deductible.
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What investment expenses can be deductible?
Deductible expenses include accounting fees, attorney fees, bank charges, clerical help, office rent, and investment advisor fees.
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What are deductible expenses for managing investments?
Expenses like accounting fees, attorney fees, and trustee's commissions related to managing investments can be deductible.
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Can you deduct expenses from S-corporations or partnerships?
Yes, your share of investment expenses from S-corporations, REITs, or other partnerships can be deducted.
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What deduction can a licensee claim for driving for work?
A licensee can deduct 56 cents per mile driven for work if not reimbursed by their employer.
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What are property taxes used for?
Property taxes fund local services such as schools, fire/police departments, and public libraries.
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What does "ad valorem" mean in property taxes?
"Ad valorem" means taxes are levied based on the value of the property.
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How is property tax determined?
Property tax is based on the local government's budget, property appraisals, and tax rates.
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What is the appropriation process?
Appropriation involves local taxing bodies preparing budgets and determining the necessary property tax to cover the shortfall.
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How is property assessed for tax purposes?
Property is appraised based on fair market value, and then assessed, often at a percentage of that value.
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How is the tax rate calculated?
The tax rate is calculated by dividing the local government’s budget by the total assessed value of all taxable properties.
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How do you calculate actual property tax?
Multiply the property’s assessed value by the tax rate to determine the property tax due.
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What is a mill rate?
A mill rate is a tax rate expressed in mills (one mill equals $1 per $1,000 of property value).
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How is a mill rate applied to property taxes?
The mill rate is applied to the assessed value of a property to calculate the property tax owed.
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How is property tax calculated using the mill rate?
Multiply the assessed value by the total mill rate, then divide by 1000. For example, $200,000 assessed value with a 32 mill rate results in a $6,400 property tax.
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What is an equalization assessment?
An equalization assessment adjusts the local assessed property values to align with surrounding areas’ assessments.
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What happens if you don’t pay property taxes?
Delinquent property taxes create a lien on the property, and the property may be sold at a tax sale to pay the debt.
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What can happen if you don’t pay property taxes in Texas?
If property taxes are delinquent in Texas, the property can be foreclosed and sold at auction.
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What is the foreclosure process for delinquent taxes in Texas?
If taxes are unpaid, a court may issue a judgment and sell the property at auction. If it doesn’t sell, the county may take ownership.
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How are delinquent real estate taxes collected?
Delinquent taxes are usually collected at the time of the property sale, with penalties applied until the taxes are paid or the property is sold.
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What are the 4 main points when prorating property taxes?
1. Yearly taxes are paid in arrears.
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2. Proration is based on a 365-day year unless stated otherwise. On the exam, taxes are prorated using a 360-day year (30 days per month), and the seller is responsible for the day of closing.
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3. Proration for the current year is based on the preceding year's taxes unless stated otherwise.
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4. Seller owes the buyer for their portion of current and past year's taxes if not paid.
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How is loan assumption different from a new loan in terms of tax escrow?
In a loan assumption, the tax escrow held by the lender must first be credited to the seller and debited to the buyer, which changes the final amount the seller must pay.
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What is unique about proration of hazard insurance?
Hazard insurance is rarely assumed by the buyer. It is based on a specific period (e.g., October 16 to October 15) and prorated using a 365-day year.
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What is mortgage fraud?
Mortgage fraud refers to lying or omitting information used by a mortgage underwriter or lender to fund, purchase, or insure a mortgage loan. It can be committed by both borrowers and lenders.
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What is fraud for profit in mortgage fraud?
Fraud for profit is committed by industry insiders (e.g., bank officers, appraisers, mortgage bankers) who misuse the mortgage lending process to steal cash or equity from lenders or homeowners.
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What is fraud for property in mortgage fraud?
Fraud for property is committed by borrowers to gain or maintain property ownership, such as lying about income to secure a loan.
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What is a false appraisal?
A false appraisal involves a conspiracy between buyers, sellers, appraisers, and/or real estate agents to convince a secondary market lender to loan more money than the property is worth.
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What are double contracts in mortgage fraud?
Double contracts involve a seller and buyer writing two contracts: one with actual terms, and the other with a fake higher price given to the lender to trick them into loaning more money.
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What are illegal kickbacks in mortgage fraud?
Illegal kickbacks involve a seller providing incentives to a buyer (e.g., cash or gifts) without notifying the lender. It is only legal if disclosed and approved by the lender.
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What is equity skimming?
Equity skimming is a felony, usually involving government-backed loans, where individuals take equity from a homeowner without paying off the mortgage, often leaving the homeowner in financial trouble.
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What is a violation of consumer legislation in real estate?
Violations can include false claims in advertising or improper disclosure, refusing to accept offers based on race or religion (violating ECOA), and violating consumer protection laws like Regulation Z or RESPA.
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What are predatory lenders?
Predatory lenders aim to maximize their fees and income at the expense of homeowners, often using schemes like refinancing to adjustable-rate loans or negative amortization loans that deceive borrowers and increase their debt.
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What is a fixed-rate loan?
A fixed-rate loan is a loan where the interest rate remains unchanged for the entire term or part of the loan term. This type of loan is preferred for long-term loans because the borrower can predict future costs and monthly payments.
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Why do most borrowers prefer fixed-rate loans for long-term loans?
Borrowers prefer fixed-rate loans for long-term loans because they provide stability and predictability, with fixed payments and interest rates over time.
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What happens if interest rates rise during a fixed-rate loan term?
If interest rates rise, the fixed-rate loan is unaffected. The interest rate remains the same, so the borrower does not have to worry about increased payments.
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When is a fixed-rate loan preferred over a variable-rate loan?
A fixed-rate loan is preferred when interest rates are expected to increase in the future, as it locks in the current interest rate and protects the borrower from future changes.
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When is it better to opt for a variable-rate loan?
A variable-rate loan is better when interest rates are expected to decrease, as the loan cost would decrease with the rate changes.
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What is the most common real estate financing vehicle?
The most common real estate financing vehicle is a fixed-rate mortgage, where the loan has fixed interest rates and fixed, equal payments for the entire term.
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What is the typical term length for a fixed-rate loan?
The typical term for a fixed-rate loan is 30 years, but terms ranging from 10 to 40 years are also common.
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Can the payments of a fully amortized fixed-rate loan be reduced?
No, with a fully amortized fixed-rate loan, the payment is fixed for the life of the loan. Additional principal pre-payments shorten the remaining term but do not reduce the minimum payment.
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Are fixed-rate mortgages typically assumable?
No, fixed-rate mortgages are almost never assumable.
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What is an adjustable-rate mortgage (ARM)?
An adjustable-rate mortgage (ARM) is a loan where the interest rate starts fixed for an initial period and adjusts periodically after that to reflect changes in the economy or Federal Reserve rates.
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What is the most common adjustable-rate mortgage product?
The most common ARM product is the 5/1 adjustable-rate mortgage, where the interest rate is fixed for the first five years, and then adjusts annually after that.
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What happens when interest rates rise after the initial period of an ARM?
If interest rates rise after the initial period, the borrower will face higher monthly payments based on the new adjusted rate.
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What is a balloon loan?
A balloon loan is a partially amortized loan where the payments are based on a full term (typically 30 years), but the entire balance is due earlier, usually at the end of 5, 7, or 10 years.
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What is a balloon payment?
A balloon payment is a large lump-sum payment made at the end of the balloon loan term, usually much larger than the regular monthly payments.
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Why are balloon loans typically favored by some borrowers?
Balloon loans are favored by borrowers who plan to own the property for a short time and expect to refinance or sell before the balloon payment becomes due.
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What is a graduated payment mortgage (GPM)?
A graduated payment mortgage (GPM) has fixed interest rates but varying monthly payments. The payment increases by a set percentage for a few years before converting to a fixed monthly payment for the remainder of the term.
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What is negative amortization in a GPM?
Negative amortization occurs when the initial payments on a GPM do not cover all the interest, so the unpaid interest is added to the loan balance, making the loan larger than the original balance.
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What is an option ARM?
An option ARM is a loan where the borrower can choose from four payment options each month: the minimum payment based on a low initial interest rate, the interest-only payment, a payment to amortize the loan in 30 years, or a payment to amortize in 15 years. The initial low payment may result in negative amortization.
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What is a hybrid ARM?
A hybrid ARM combines a fixed-rate mortgage for a specific time period (e.g., 3, 5, 7, or 10 years) followed by an adjustable-rate period. The most common configuration is the 5/1 hybrid ARM, where the rate is fixed for 5 years and then adjusts yearly.
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What is a budget loan?
A budget loan includes payments into an escrow account for taxes and insurance, in addition to the principal and interest (PITI) payments. This ensures the borrower’s taxes and insurance are paid on time.
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What is escrow in a budget loan?
Escrow in a budget loan refers to the practice of collecting money for taxes and insurance premiums as part of the monthly payment, which the lender then pays to the appropriate parties.
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When is escrow required in a loan?
Escrow is required for all government loans (VA or FHA) and for conventional loans when the down payment is less than 20% or if the property is in a flood hazard area.
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What is an Interest Only Loan (I/O)?
An interest-only loan requires payments covering only the interest due, allowing lower initial payments. The borrower doesn’t build equity during the I/O period, which typically lasts up to 10 years. Fixed-rate loans have fixed interest payments, while adjustable-rate loans may change based on adjustment terms.
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What is the advantage of an Interest Only Loan?
The advantage is lower initial payments, and the option to reduce payments by making large principal payments before the I/O period ends.
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What is the disadvantage of an Interest Only Loan?
The disadvantage is no principal reduction during the I/O period, meaning no equity is built in the property.
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How does a Bi-weekly Loan work?
A bi-weekly loan requires payments every two weeks, making 26 payments per year (equivalent to 13 monthly payments). This accelerates loan payoff and saves on interest, typically paying off a 30-year loan in 20 years.
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What is the disadvantage of a Bi-weekly Loan?
It requires automatic payments and often has a fee to set up.
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What is a Buy-Down Loan?
A buy-down loan offers lower payments for the first 2-3 years. For example, in a 2-1 buy-down, the first year is based on a lower rate (e.g., 6%), and the second year on a slightly higher rate (e.g., 7%). The cost is the difference in payments for those years.
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What is a Construction Loan?
A construction loan is a short-term loan used for real estate project construction, disbursed in installments as the project progresses. Once construction is complete, it converts to permanent financing or requires refinancing.
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What is a Bridge Loan?
A bridge loan allows a buyer to close on a new property before selling the current one, using equity from the existing property. It must be paid off once the previous property is sold.
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What is a Term Loan?
A term loan has no payments during the term, with the entire balance due at the end. It is usually for one year or less.
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What is a Package Mortgage?
A package mortgage finances both real and personal property, such as appliances or furniture, and includes these items in the lender's security.
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What is a Blanket Mortgage?
A blanket mortgage is secured by multiple properties, such as all lots in a subdivision. It typically includes a partial-release clause allowing individual lots to be released upon payment.
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What is a Piggyback Loan?
A piggyback loan involves two mortgages: a first mortgage for 75%-80% of the value and a second mortgage to cover the down payment. The combined loans are known as the Combined Loan to Value (CLTV).
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What is a Participation Mortgage?
A participation mortgage allows the lender to share in the income or appreciation of a property in exchange for a lower interest rate.
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What is a Purchase Money Mortgage?
A purchase money mortgage is a loan where the borrower does not receive cash but makes payments toward the property being purchased.
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What is a Hard Money Mortgage?
A hard money mortgage involves a loan secured by cash, such as a second mortgage or home equity loan, often through a cash-out refinance.
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What is a Home Equity Mortgage?
A home equity mortgage is a loan secured by the equity in the property, typically used for repairs or improvements. Interest on loans up to $100,000 may be tax-deductible, with conditions.
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What is an Open-End Mortgage?
An open-end mortgage allows the borrower to borrow additional money under the original note/security instrument, similar to a Home Equity Line of Credit (HELOC).
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What does "prorate" mean in real estate?
To prorate means to divide expenses or income proportionately, such as interest, taxes, or rent, between parties.
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How are prorations calculated?
Prorations are calculated by determining the number of days owed, using either a 360-day year (banker's year) or 365 days (calendar year), depending on the problem's instructions.
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What is the difference between prorating "through the day of closing" and "to the day of closing"?
When prorating "through the day of closing," the seller is responsible for the day of closing. When prorating "to the day of closing," the buyer is responsible for the day of closing.
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How is interest paid on a loan?
Interest is typically paid in arrears, meaning the payment on the first of the month covers interest for the previous month.
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How do you calculate interest on a new loan?
Annual Interest = Principal * Interest Rate. Daily Interest = Annual Interest / Days in Year.
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What does PITI stand for?
PITI stands for Principal, Interest, Taxes, and Insurance.
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How does the "T" and "I" in PITI vary over time?
The "T" (taxes) and "I" (insurance) can fluctuate as real estate taxes and homeowners' insurance rates increase over time, while the principal and interest (P + I) remain the same with a fixed-rate loan.
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What happens to the payment breakdown of P + I over time with a fixed-rate loan?
As the loan matures, the portion of the payment that goes toward principal increases, and the portion that goes toward interest decreases.
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What is amortization in a loan?
Amortization is the process where the balance of the loan is gradually reduced over time, and the interest is paid on the remaining balance.
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What happens when the final payment is made on a loan?
The final payment on the loan will pay off the remaining balance, and the loan will be fully paid. The last payment may be slightly less than the equal monthly payments made throughout the loan term.
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How is the monthly PI payment calculated?
The monthly PI payment can be calculated using a formula or with the help of online calculators or financial calculator functions like PMT.
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What is the principal amount of Roger Morgan's loan in the example?
Roger Morgan's principal amount is $81,222.08.
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What is the interest rate and loan term for Roger Morgan's loan in the example?
The interest rate is 12%, and the loan term is 10 years.
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When is the first PI payment due for Roger Morgan’s loan?
The first PI payment is due on August 1.
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How is the interest for Roger Morgan’s loan calculated at closing?
The interest for July (interest is paid in arrears) is calculated by multiplying the principal amount ($81,222.08) by the interest rate (12%), then dividing by 365 to get the daily rate, and finally multiplying by the number of days the loan was active (2 days), resulting in $53.41.
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How much does the buyer owe at closing for interest in Roger Morgan’s loan?
The buyer owes $53.41 for interest at closing, which is the seller's due amount for the time the loan was active before the closing date.
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How much is the cash at closing in the example?
The cash at closing is $9,000.
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What is the purpose of the worksheet in the example?
The worksheet is used to determine the exact true balance due after adding closing costs and fees, not just the down payment amount.
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What was the cost of the tax certificate in the example?
The cost of the tax certificate was $20.
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How are property taxes prorated at closing in the example?
Property taxes are prorated based on last year's taxes, with the seller paying for the portion of the year they owned the property. In this case, the seller owes taxes for 179 days.
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What are the prorated property taxes for the seller in the example?
The seller owes $735.62 in property taxes (calculated as $1,500/365 x 179 = $735.62).
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Who pays the property taxes at closing in the example?
The seller pays the buyer for the property taxes for the portion of the year they owned the home, and the buyer will pay the full year's taxes next year.
