Real Estate Ch. 9.docx - Real Estate Ch 9 Finance The Laws and Contracts Intro a Most real estate transactions involve debt financing i Homebuyers lack

Real Estate Ch. 9.docx - Real Estate Ch 9 Finance The Laws...

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Real Estate Ch. 9: Finance, The Laws and ContractsIntroa.Most real estate transactions involve debt financingi.Homebuyers lack the cash to purchase their residence outrightii.Businesses want their cash available in their core business rather than to tie it up in real estateiii.Investors want to “leverage” their investment through debt in order to increase equity returns/be able to acquire more assets and greater diversificationiv.Homeowners find their best source of financing for household needs is a credit line loan secured by their houseb.As a result, mortgage debt financing is a major aspect of real estate decisions/ mortgage lending is a major industryc.This chapter is the “rules of the game” for mortgage financed.In a mortgage loan the borrower always creates 2 documents:i.Note1.Details the financial rights and obligations bw borrower and lender2.Computation of the interest rate (if adjustable)3.Whether a loan can be paid off early (and at what cost)4.Whether there is personal liability for a mortgage5.What fees can be charged for late payments6.Whether the loan must be repaid upon sale of the property7.Whether the lender has the right to terminate the loan, calling it dueii.Mortgage(or deed of trust): pledges the property as security for the debte.In case of default on a mortgage, a lender’s ultimate resource is foreclosure- but foreclosure is expensive and the lender needs to know what the alternatives are, along wit their risksf.Bankruptcy frequently accompanies default- can have serious consequences that a lender must understandg.When property is purchased, new mortgage debt is not the only means of financing the purchasei.Existing debt may be preserved, in which case the seller and buyer must understand their liabilityii.Contract for deedh.Borrower and lender need to understand federal laws governing the residential mortgage debtThe NoteI.Notea.Defines the exact terms and conditions of the loanb.Both the large size of real estate loans & long maturity make note be very explicit to prevent misunderstandings bw borrower and lenderII.Interest Rate and Interest Charges
a.Interest rates can be fixed or variable, either way most small to medium sizedreal estate loans follow the same conventions for interest rate computation and interest chargeb.Actual interest charged per month= annual stated contract interest rate divided by 12, multiplied by the beginning-of-month balancec.Payment is due on the first day of the following monthIII.Adjustable ratesa.Common in commercial real estate loans and home loans where the loan is known as an adjustable rate mortgage (ARM)b.Used in all home equity credit line mortgage loansc.Number of components must be defined in the note:1.Indexa.Index rateis a market determined interest rate that is the “moving part” in the adjustable interest rateb.Most common index rates include U.S. Treasury constant maturity ratesand a cost-of-funds indexfor depository lendersc.LIBOR

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