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Washington Real Estate Fundamentals Lesson 10: Principles of Real Estate Financing © 2011 Rockwell Publishing.

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Presentation on theme: "Washington Real Estate Fundamentals Lesson 10: Principles of Real Estate Financing © 2011 Rockwell Publishing."— Presentation transcript:

1 Washington Real Estate Fundamentals Lesson 10: Principles of Real Estate Financing © 2011 Rockwell Publishing

2 Economics of Real Estate Finance For a lender, a loan is an investment. Interest paid on loan is lenders return. Riskier loan requires higher return (higher interest rate). Interest rate charged on a loan also depends on market forces and real estate cycles. © 2011 Rockwell Publishing

3 Economics of Real Estate Finance Real estate cycles Real estate cycles: Periodic shifts in level of activity in real estate market. Real estate cycles obey law of supply and demand. © 2011 Rockwell Publishing

4 Real Estate Cycles Law of supply and demand Home prices go up when demand is high and supply is low. Sellers market. High prices stimulate home construction. Home prices go down when supply is high and demand is low. Buyers market. Low prices stimulate demand, and cycle begins again. © 2011 Rockwell Publishing

5 Real Estate Cycles Mortgage loan funds Demand for homes tied to changes in supply of and demand for mortgage loan funds. When supply of mortgage funds is large: interest rates low demand for home loans increases When funds are scarce: interest rates high (tight money market) demand for home loans decreases © 2011 Rockwell Publishing

6 Real Estate Cycles Mortgage loan funds Supply of mortgage loan funds depends on: how much money investors have available how much they choose to invest in mortgage loans This is affected by: overall economy market interest rates how mortgage lending compares to other investments © 2011 Rockwell Publishing

7 Economics of Real Estate Finance Interest rates and federal policy Federal government influences real estate financing and rest of economy through: fiscal policy monetary policy © 2011 Rockwell Publishing

8 Interest Rates and Federal Policy Fiscal policy Fiscal policy includes: spending taxation debt management Set by Congress and the President, through tax legislation and federal budget. © 2011 Rockwell Publishing

9 Interest Rates and Federal Policy Fiscal policy Federal deficit: Shortfall created when U.S. government spends more than it collects in revenue. To cover deficit, Treasury borrows money by selling interest-bearing securities to investors. Less money available for investment in private sector. Increase in deficit tends to make interest rates rise. © 2011 Rockwell Publishing

10 Interest Rates and Federal Policy Monetary policy Monetary policy: Federal governments direct efforts to control money supply and interest rates. Monetary policy determined by Federal Reserve (the Fed). Major goals: economic growth stability in interest rates and markets © 2011 Rockwell Publishing

11 Interest Rates and Federal Policy Monetary policy Federal Reserve sets monetary policy using these tools: key interest rates reserve requirements open market operations © 2011 Rockwell Publishing

12 Monetary Policy Key interest rates Fed has control over two interest rates: federal funds rate discount rate These are rates charged when a bank borrows from another bank or from a Federal Reserve Bank. © 2011 Rockwell Publishing

13 Monetary Policy Key interest rates If Fed raises key rates, banks also raise interest rates they charge borrowers. If Fed lowers key rates, banks also lower their interest rates. Lower interest rates usually stimulate economy. © 2011 Rockwell Publishing

14 Monetary Policy Reserve requirements Reserve requirements: Amount of money (percentage of deposits) banks must maintain on deposit, to meet requests for withdrawals. If Fed raises reserve requirements: less money available for lending interest rates go up If Fed lowers reserve requirements: more money available for lending interest rates go down © 2011 Rockwell Publishing

15 Monetary Policy Open market operations Open market operations: When Fed buys and sells government securities (such as Treasury notes). Feds primary method of managing money supply. © 2011 Rockwell Publishing

16 Monetary Policy Open market operations Buying government securities from investors puts more money into circulation, so that: money supply increases interest rates go down Selling government securities to investors takes money out of circulation, so that: money supply decreases interest rates go up © 2011 Rockwell Publishing

17 Interest Rates and Federal Policy Other agencies that affect financing Several other federal agencies also affect real estate financing, such as: Federal Home Loan Bank System Federal Deposit Insurance Corp. (FDIC) Dept. of Housing and Urban Development (HUD) Rural Housing Service Farm Credit System © 2011 Rockwell Publishing

18 Summary Economics of Real Estate Finance Real estate cycles Supply and demand Fiscal policy Federal deficit Monetary policy Key interest rates Reserve requirements Open market operations © 2011 Rockwell Publishing

19 Real Estate Finance Markets Two finance markets supply funds for real estate loans: primary market secondary market © 2011 Rockwell Publishing

20 Real Estate Finance Markets Primary market Primary market: Market in which mortgage lenders make loans to home buyers. Historically, primary market was strictly local: local banks and savings & loans. Now much more diverse, but local economic conditions still have impact on amount of funds lenders have available. © 2011 Rockwell Publishing

21 Real Estate Finance Markets Primary market When local economy booming: less money saved local lenders cant keep up with demand for loans When local economy slow: more money saved local lenders have ample funds but little demand for loans © 2011 Rockwell Publishing

22 Real Estate Finance Markets Primary market For lenders, its a problem to have either too much or too little money on deposit. To address this problem, lenders look for opportunities beyond the local market. © 2011 Rockwell Publishing

23 Real Estate Finance Markets Secondary market Secondary market: Market in which private investors and government-sponsored agencies buy and sell mortgages secured by real estate nationwide. Allows local lenders to sell loans, to obtain more funds to make more loans. Moderates local real estate cycles because its a national market. © 2011 Rockwell Publishing

24 Secondary Market Buying and selling loans Mortgage loans can be bought and sold like other investments (such as stocks or bonds). Value of loan depends on rate of return and risk of default. Investors generally buy loans at a discount (for less than face value). But discounted loans can be foreclosed for face value if borrower defaults. © 2011 Rockwell Publishing

25 Secondary Market Government-sponsored agencies Federal government established three secondary market agencies: Fannie Mae Freddie Mac Ginnie Mae © 2011 Rockwell Publishing

26 Secondary Market Agencies Securitizing loans Role of secondary market agencies: buying loans from primary market lenders issuing securities using the loans as collateral selling these mortgage-backed securities to investors guaranteeing investors a return even if borrowers default © 2011 Rockwell Publishing

27 Secondary Market Agencies Underwriting standards To reduce risk of default, agencies established their own underwriting standards. Underwriting standards: Criteria used to evaluate loan applicant and property offered as security. Primary market lenders that want to sell loans on secondary market generally must meet agencies standards. © 2011 Rockwell Publishing

28 Secondary Market Agencies Fannie Mae Federal National Mortgage Association (FNMA) Created as federal agency in 1938 to establish secondary market for FHA loans. Reorganized as private corporation (government-sponsored enterprise, or GSE) in Buys and securitizes conventional, FHA, and VA loans. © 2011 Rockwell Publishing

29 Secondary Market Agencies Freddie Mac Federal Home Loan Mortgage Corporation Created in 1970 to provide secondary market for savings and loans. Like Fannie Mae: government-sponsored enterprise buys and securitizes conventional, FHA, and VA loans © 2011 Rockwell Publishing

30 Secondary Market Agencies Ginnie Mae Government National Mortgage Association Government agency within HUD. Guarantees securities backed by FHA and VA loans. © 2011 Rockwell Publishing

31 Secondary Market Agencies Recent developments Because of severe financial problems brought on by the recession, federal government placed both Fannie Mae and Freddie Mac in conservatorship in Also created new regulator for them: Federal Housing Financing Agency (FHFA). © 2011 Rockwell Publishing

32 Summary Real Estate Finance Markets Primary market Secondary market Secondary market agencies Government-sponsored enterprises Loan discounting Mortgage-backed securities Underwriting standards © 2011 Rockwell Publishing

33 Real Estate Finance Documents Most real estate buyers are required to sign two finance documents: promissory note security instrument (either a mortgage or a deed of trust) © 2011 Rockwell Publishing

34 Real Estate Finance Documents Promissory notes Promissory note: Written promise to repay a debt (plus interest, in most cases). Borrower = Maker Lender = Payee © 2011 Rockwell Publishing

35 Promissory Notes Basic provisions Promissory note states: amount borrowed (principal) interest rate (and whether fixed or variable) payment amount when and how payments are to be made maturity date (when loan to be paid in full) consequences of default Does not include property description. © 2011 Rockwell Publishing

36 Promissory Notes Types of notes Promissory notes classified according to how principal and interest are repaid: Straight note Installment note © 2011 Rockwell Publishing

37 Types of Notes Straight note Straight note: Promissory note used for term loan, also called interest-only loan. Payments during loan term cover only interest (no principal). At end of term, borrower must pay back entire principal amount with one balloon payment. © 2011 Rockwell Publishing

38 Types of Notes Installment note Installment note: Promissory note used for amortized loan. Part of each payment is interest and the rest is principal. Each payment gradually reduces loans principal balance. If note fully amortized, payments pay off all principal and interest by end of term. © 2011 Rockwell Publishing

39 Promissory Notes Simple interest Interest paid on a real estate loan is almost always simple interest, as opposed to compound interest. Interest is computed only on remaining principal balance. Not computed on previously accrued interest as well as on principal. © 2011 Rockwell Publishing

40 Promissory Notes Negotiable instruments Most promissory notes used in real estate transactions are negotiable instruments. Negotiable instrument: Debt can be assigned to someone else by endorsement (like a check). Endorsing note transfers right of payment to new party. © 2011 Rockwell Publishing

41 Real Estate Finance Documents Security instruments Security instrument: Contract that makes borrowers property collateral for loan. Either a mortgage or a deed of trust. If borrower doesnt repay loan, lender can foreclose on property. Foreclosure: Forced sale of debtors property so that creditor can collect debt from sale proceeds. © 2011 Rockwell Publishing

42 Security Instruments Secured creditor Secured creditor: Creditor who has security interest in debtors property. Promissory note can be enforced without security instrument. Creditor can sue to enforce note. But secured creditor more certain of collecting debt than unsecured creditor. © 2011 Rockwell Publishing

43 Security Instruments Historical background Hypothecation: Borrower transferred title to lender as security, but retained possession of collateral property. Lender held legal title (also called naked or bare title): title without possessory rights. Borrower had equitable title: possessory rights without legal title. Still works this way in some states. © 2011 Rockwell Publishing

44 Security Instruments Historical background In title theory states, lender holds legal title throughout loan term. In lien theory states: Borrower retains full title while paying loan off. Lender only has lien against property. Most states, including Washington, are lien theory states. © 2011 Rockwell Publishing

45 Security Instruments Types of security instruments Two types of real estate security instruments: mortgages deeds of trust Main difference: Foreclosure easier with deed of trust. Deeds of trust much more widely used than mortgages in Washington and some other states. © 2011 Rockwell Publishing

46 Types of Security Instruments Mortgage Two parties to a mortgage: mortgagor (borrower) mortgagee (lender) But note that mortgage and mortgage loan are commonly used to refer to any loan secured by real estate, regardless of type of security instrument actually used. © 2011 Rockwell Publishing

47 Types of Security Instruments Deed of trust Three parties to a deed of trust: trustor or grantor (borrower) beneficiary (lender) trustee (neutral third party who handles foreclosure if necessary) Language in deed of trust based in title theory; says legal title conveyed to trustee pending repayment of debt. © 2011 Rockwell Publishing

48 Security Instruments Recording Lender should record security instrument as soon as loan is made. Recording: gives public notice of lenders lien against the property protects lender from subsequent claims © 2011 Rockwell Publishing

49 Summary Real Estate Finance Documents Promissory note Straight note Installment note Security instrument Foreclosure Secured creditor Mortgage Deed of trust Hypothecation Title theory and lien theory © 2011 Rockwell Publishing

50 Finance Document Provisions Mortgaging or granting clause Taxes and insurance Acceleration clause Alienation clause Late payment penalty provision Lock-in clause Prepayment provision Subordination clause Defeasance clause © 2011 Rockwell Publishing

51 Finance Document Provisions Mortgaging or granting clause Security instrument must include statement that property is pledged as security for loan. Mortgaging clause in mortgage. Granting clause in deed of trust. Must also include description adequate to identify the security property. © 2011 Rockwell Publishing

52 Finance Document Provisions Taxes and insurance Security instrument provides that borrower must: keep security property adequately insured against hazards such as fire pay all property taxes and special assessments Failure to comply is default on the mortgage, just like failing to make loan payments. © 2011 Rockwell Publishing

53 Finance Document Provisions Acceleration clause Acceleration clause: Gives lender right to demand immediate payment of entire principal balance if borrower defaults. Aka call provision (calling the note). Clause in both note and security instrument. Triggered by any default on terms of either document. © 2011 Rockwell Publishing

54 Finance Document Provisions Alienation clause Alienation clause: Gives lender right to accelerate loan if borrower sells security property or transfers an interest. Aka due-on-sale clause. Doesnt prohibit sale of property. Does allow lender to force borrower to pay off loan if property sold without lenders approval. © 2011 Rockwell Publishing

55 Alienation Clause Sale without loan payoff If loan not paid off when property sold, buyer takes title subject to lenders lien. Buyer may assume mortgage or deed of trust. Buyer has primary liability to lender. Original borrower has secondary liability. If buyer does not assume loan: buyer not personally liable for repayment lender can still foreclose in case of default © 2011 Rockwell Publishing

56 Alienation Clause Assumption with lenders approval If mortgage or deed of trust has alienation clause, lender has opportunity to screen buyer. If buyer creditworthy, lender will: approve buyers assumption of loan release original borrower from liability Lender charges buyer assumption fee and may raise interest rate. © 2011 Rockwell Publishing

57 Alienation Clause Assumption with lenders approval Buyer assuming loan should ask lender to provide certificate of reduction. Certificate of reduction: States loans principal balance as of assumption date. Also called estoppel certificate. © 2011 Rockwell Publishing

58 Finance Document Provisions Late payment penalty provision Late payment charges allowed only if clearly defined in finance documents and reasonable. Federal law limits late fees for many residential loans. IRS does not regard late payment penalties as interest, so not tax-deductible. © 2011 Rockwell Publishing

59 Finance Document Provisions Lock-in clause Lock-in clause: Prohibits borrower from paying loan off early (prepaying loan). Borrower locked in to loan payments for full term, or for specified number of years. Helps ensure that lender will receive anticipated return on investment. © 2011 Rockwell Publishing

60 Finance Document Provisions Prepayment provision Prepayment penalty: Charge borrower must pay lender if more than a specified amount of principal repaid before payment due. Many loans have no prepayment penalty. This type is called an open mortgage. Prepayment penalties are: more common with subprime loans limited by federal and state law © 2011 Rockwell Publishing

61 Finance Document Provisions Subordination clause Subordination clause: Gives this security instrument lower lien priority than another security instrument to be recorded later. Common in loans for purchase of vacant land that borrower intends to develop. When construction loan obtained, that later lender will demand first lien position. Construction loans are high-risk. © 2011 Rockwell Publishing

62 Finance Document Provisions Defeasance clause Defeasance clause: Provision in which lender agrees to cancel security instrument when debt has been paid off. Lender must provide lien release document for recording: deed of reconveyance satisfaction of mortgage © 2011 Rockwell Publishing

63 Summary Finance Document Provisions Mortgaging or granting clause Acceleration clause Alienation clause Assumption Lock-in clause Prepayment provision Subordination clause Defeasance clause Deed of reconveyance Satisfaction of mortgage © 2011 Rockwell Publishing

64 Foreclosure Procedures Foreclosure: Forced sale of debtors property so that creditor can collect debt from sale proceeds. Foreclosure is real estate lenders remedy when borrower defaults. Default may be: failure to repay loan failure to insure property or pay taxes breach of other loan agreement provision © 2011 Rockwell Publishing

65 Foreclosure Procedures Two main forms of foreclosure: judicial foreclosure nonjudicial foreclosure As a general rule: mortgages are foreclosed judicially deeds of trust are foreclosed nonjudicially © 2011 Rockwell Publishing

66 Foreclosure Procedures Judicial foreclosure Main steps in judicial foreclosure: Mortgagee files lawsuit against mortgagor called foreclosure action. Junior lienholders notified. Judge issues decree of foreclosure. Property sold at public auction called sheriffs sale. Highest bidder given certificate of sale. © 2011 Rockwell Publishing

67 Judicial Foreclosure Equitable redemption Equitable redemption period: Period from filing of foreclosure action until sheriffs sale. During this period, borrower may stop foreclosure and redeem property by paying: mortgage debt in full, including all principal and interest costs incurred because of foreclosure © 2011 Rockwell Publishing

68 Judicial Foreclosure Statutory redemption Statutory redemption period: Period after sheriffs sale when borrower has final chance to redeem property. In Washington: eight months if lender waives right to deficiency judgment one year if lender does not Sheriffs deed: Deed given to holder of certificate of sale at end of statutory redemption period if property not redeemed. © 2011 Rockwell Publishing

69 Judicial Foreclosure Surplus or deficiency After judicial foreclosure: Borrower entitled to any surplus left after mortgage and other liens paid off. But if proceeds dont even cover loan amount, lender may be entitled to deficiency judgment for the difference. Non-recourse mortgage: Mortgage that does not permit deficiency judgment. © 2011 Rockwell Publishing

70 Foreclosure Procedures Nonjudicial foreclosure Power of sale clause: Provision in deed of trust authorizing trustee to sell property (without going to court) if borrower defaults. © 2011 Rockwell Publishing

71 Nonjudicial Foreclosure Main steps Trustee sends borrower notice of default. Trustee issues notice of sale one month later. Notice of sale recorded and sent to borrower, junior lienholders, and anyone who recorded request for notice. Trustee conducts auction called trustees sale. Successful bidder receives trustees deed. © 2011 Rockwell Publishing

72 Nonjudicial Foreclosure Reinstatement and redemption Borrower may reinstate loan and stop foreclosure: by paying only past due amount plus costs until shortly before date of trustees sale Or borrower may redeem property: by paying off entire debt plus costs at any time until trustees sale held No post-sale redemption allowed. © 2011 Rockwell Publishing

73 Nonjudicial Foreclosure Surplus or deficiency As with judicial foreclosure, borrower entitled to any surplus after deed of trust and other liens paid off. However, deficiency judgment not permitted after nonjudicial foreclosure. If proceeds dont cover amount owed, lender cant sue borrower for difference. © 2011 Rockwell Publishing

74 Alternatives to Foreclosure Three alternatives to foreclosure for defaulting borrower: loan workout deed in lieu of foreclosure short sale © 2011 Rockwell Publishing

75 Alternatives to Foreclosure Loan workouts Loan workout: Arrangement in which lender agrees to change payment schedule or other loan terms to help borrower avoid foreclosure. Forbearance: Extra time to repay. Loan modification might involve: changing variable interest rate to fixed lowering interest rate reducing principal amount owed © 2011 Rockwell Publishing

76 Alternatives to Foreclosure Deeds in lieu of foreclosure Deed in lieu: Borrower who cant arrange loan workout may avoid foreclosure by giving lender a deed in lieu of foreclosure. Deed transfers title from borrower to lender. Lender takes title subject to any liens other than its own. Borrower should make sure lender cant sue for deficiency. © 2011 Rockwell Publishing

77 Alternatives to Foreclosure Short sales Short sale: When security property is sold for whatever it will bring on open market, but short of amount still owed on loan. Lender generally agrees to accept proceeds from sale as payment in full. Borrower should make sure lender cant sue for deficiency. Difficult to arrange if multiple lenders. © 2011 Rockwell Publishing

78 Summary Foreclosure and Alternatives Judicial foreclosure Nonjudicial foreclosure Reinstatement Redemption Deficiency judgment Loan workout Deed in lieu Short sale © 2011 Rockwell Publishing

79 Land Contracts Land contract: Financing agreement in which real estate buyer agrees to pay seller purchase price in installments over time. Alternative to note plus mortgage or deed of trust, in seller-financed transaction. Also called real estate contract, real property sales contract, conditional sales contract, installment sales contract, or contract for deed. © 2011 Rockwell Publishing

80 Land Contracts Vendor and vendee Seller = Vendor Buyer = Vendee Vendee agrees to make regular payments of principal and interest to vendor over specified period. Vendee takes immediate possession of property. © 2011 Rockwell Publishing

81 Land Contracts Equitable title and legal title Although vendee takes possession immediately, holds only equitable title to property during contract term. Vendor keeps legal title until contract price paid in full. When contract paid off, vendor delivers deed to vendee, transferring fee simple estate. © 2011 Rockwell Publishing

82 Land Contracts Rights and responsibilities Vendee should record land contract to protect equitable interest. Vendee responsible for paying property taxes and insuring property while paying off contract. Vendor may encumber property, but not in a way that prevents delivery of clear title when contract paid off. © 2011 Rockwell Publishing

83 Land Contracts Default If vendee defaults on land contract, vendor may: foreclose judicially declare a forfeiture © 2011 Rockwell Publishing

84 Land Contracts Forfeiture Forfeiture allows vendor to terminate land contract and regain possession of property: without having to go to court without refunding vendees payments In Washington, this option applies only if contract has forfeiture clause and is recorded. Law also gives vendee with substantial equity some protection against forfeiture. © 2011 Rockwell Publishing

85 Summary Land Contracts Land contract Vendor Vendee Legal title Equitable title Forfeiture © 2011 Rockwell Publishing

86 Types of Mortgage Loans Different types of mortgage loans are used in various circumstances or designed to serve particular functions. In spite of term mortgage loan, deed of trust would almost always be used in Washington. © 2011 Rockwell Publishing

87 Types of Mortgage Loans First or second First mortgage: Loan against a property that has higher lien priority than any other loans. Loans against same property with lower priority are second mortgage, third mortgage, and so on. © 2011 Rockwell Publishing

88 Types of Mortgage Loans Senior or junior First mortgage is senior to second mortgage. Second mortgage is junior to first mortgage, but senior to third mortgage. Lien priority determines order in which loans will be paid off in foreclosure. © 2011 Rockwell Publishing

89 Types of Mortgage Loans Purchase money Purchase money mortgage: In general, any mortgage loan used to buy the property that will serve as security for the loan. But also used more narrowly to refer to mortgage in seller-financed transaction. Seller extends credit to buyer and carries back mortgage. Buyer pays seller in installments. © 2011 Rockwell Publishing

90 Types of Mortgage Loans Soft or hard money Soft money mortgage: When seller gives buyer credit in exchange for mortgage. Another term for purchase money mortgage in narrower sense. Hard money mortgage: When lender gives borrower cash in exchange for mortgage. May be purchase money mortgage in broader sense, unless borrower already owns security property. © 2011 Rockwell Publishing

91 Types of Mortgage Loans Budget Budget mortgage: When borrowers monthly payment includes prorated share of property taxes and insurance in addition to principal and interest. Lender holds funds in reserve account, pays taxes and insurance when due. Reserve account is aka impound account. © 2011 Rockwell Publishing

92 Types of Mortgage Loans Package Package mortgage: When single loan is used to purchase personal property along with real property. Example: Buyer purchases commercial ovens, freezers, and other equipment along with restaurant property. © 2011 Rockwell Publishing

93 Types of Mortgage Loans Construction Construction loan: Temporary loan used to finance construction of improvements on land. Aka interim loan. Take-out loan: Permanent financing of construction debt, replacing interim loan after construction completed. © 2011 Rockwell Publishing

94 Types of Mortgage Loans Construction Construction loans are risky: borrower could exhaust loan funds before construction finished. To prevent that, construction lenders have various ways of disbursing funds, such as: Fixed disbursement plan: Borrower receives obligatory advances at various stages in construction process. Lender may also hold back 10% or more for mechanics lien claims. © 2011 Rockwell Publishing

95 Types of Mortgage Loans Blanket Blanket mortgage: When several pieces of property secure a single loan. Common in subdivision development. Partial release clause: Requires lender to release some parcels from blanket lien once certain portion of loan repaid. © 2011 Rockwell Publishing

96 Types of Mortgage Loans Participation Participation mortgage: Lender entitled to portion of security propertys earnings, in addition to interest on principal. Most common on large commercial projects. Lender is insurance company or other large investor. © 2011 Rockwell Publishing

97 Types of Mortgage Loans Shared appreciation Shared appreciation mortgage: Lender entitled to portion of security propertys appreciation in value. Part of increasing equity will belong to lender rather than borrower. Equity: Difference between propertys market value and liens against it. © 2011 Rockwell Publishing

98 Types of Mortgage Loans Wraparound Wraparound mortgage: New loan to buyer that wraps around sellers existing first loan. Buyer makes payment on wraparound to seller. Seller uses portion of buyers payment to make payment on underlying loan. Underlying loan: cant have alienation clause should be paid off before wraparound is © 2011 Rockwell Publishing

99 Types of Mortgage Loans Open-end Open-end mortgage: Allows borrower who has paid off part of loan to reborrow funds without arranging new loan. Can reborrow up to the amount originally borrowed. Loan usually has variable interest rate. Often used by builders and farmers. © 2011 Rockwell Publishing

100 Types of Mortgage Loans Graduated payment Graduated payment mortgage (GPM): Borrower allowed to make smaller payments in early years of loan, then steps up to larger payments. Good for borrowers who expect income to increase. © 2011 Rockwell Publishing

101 Types of Mortgage Loans Swing Swing loan: Temporary loan to buyer who needs funds to close purchase of new property because old property hasnt sold yet. Secured by equity in old property. Paid off when sale of that property closes. Aka gap loan or bridge loan. © 2011 Rockwell Publishing

102 Types of Mortgage Loans Home equity Home equity loan: Loan secured by borrowers equity in home she already owns. Usually a second mortgage, junior to existing purchase money loan. May be used for remodeling or other improvements, or for expenses unrelated to property. HELOC: Home equity line of credit; works like credit card, but secured by equity in home. © 2011 Rockwell Publishing

103 Types of Mortgage Loans Reverse Reverse mortgage: Provides source of income for elderly person who owns home free and clear, by converting equity into cash. Owner receives monthly payment from lender in return for mortgaging home. Mortgage typically paid off when home sold after owners death. © 2011 Rockwell Publishing

104 Types of Mortgage Loans Subprime Subprime loan: Loan made to borrower who doesnt qualify for traditional (prime) mortgage loan. Credit scores or income ratios dont meet usual standards. Or may be unable or unwilling to provide standard documentation. Subprime lenders charge higher interest rates and fees to compensate for higher risk. © 2011 Rockwell Publishing

105 Types of Mortgage Loans Refinancing Refinancing: New loan used to pay off existing loan secured by same property. May be from same lender or new lender. Common reasons for refinancing: to take advantage of lower interest rates to make balloon payment on old loan Cash-out refinancing: New loan is for more than amount needed to pay off old loan. © 2011 Rockwell Publishing

106 Summary Types of Mortgage Loans Purchase money mortgage Budget mortgage Package mortgage Construction loan Blanket mortgage Participation mortgage Wraparound mortgage Open-end mortgage Home equity loan Reverse mortgage Subprime loan Refinancing © 2011 Rockwell Publishing


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