Chapter 10

Chapter 10 - Chapter 10 Real Estate Finance The Laws and...

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Chapter 10 Real Estate Finance: The Laws and Contacts 2/19/08 Most real estate transactions involve the use of debt financing. The availability of debt financing is a key factor in the growth and viablility of the real estate market. The typical real estate loan involves two primary documents executed by the borrower: the Note and the Mortgage. The Note: The note defines the terms of the loan: the loan amount (principal), interest rate, the maturity date, amount of timing of payments, etc. Interest Rate: real estate loans have an interest charge that the borrower pays to the lender as specified in the note, usually on a monthly basis. Interest rates can be fixed or variable. o Interest paid is “simple” interest, that is, a change based on the outstanding loan principal, paid in arrears o Fixed Rate: the interest rate does not change over the term of the loan. Adjustable rate mortgage(ARM): the interest rate can and will change or “adjust” periodically over the term of the loan based on a stated index, plus some margin. Common ARM’s are 1,3, and 5 year adjustables. o Common in commercial real estate loans and are the choice of many borrowers. They are used in virtually all home equity credit line mortgageloans. Index rate - a market determined interest rate that the ARM interest rate is based; typically a 1 year treasury, LIBOR, or prime. o U.S. Treasury constant maturity rates - most commonly one year in maturity, although longer maturities are used as well. o LIBOR- a common index for loans on income producing property. Margin - a stated margin or spread that is added to the index rate to arrive at the interest rate paid to the loan; typically around 2.5%. o Margin is the lender’s “markup” which is added to the index of the adjustable rate. o Ex: if the index is 4.0% and the margin is 2.5%, the interest rate is 6.5% Caps- limits how much the interest rate can change in any one adjustment period or over the term of the loan. o Periodic caps- limit change in the interest rate from one change date to the next o Overall caps- limit change over the life of the loan. *As the interest rate periodically adjusts, the monthly payments on the loan will
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This note was uploaded on 04/13/2008 for the course REAL 4000 taught by Professor Martin during the Spring '08 term at UGA.

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Chapter 10 - Chapter 10 Real Estate Finance The Laws and...

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