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Unformatted text preview: Real Estate 306 Study Guide Chapter 10: Real Estate Finance: The Laws and Contracts Importance of Mortgages More households can own their home Businesses can use their cash for core activates Investors can leverage and diversify investments Homeowners can obtain credit on better terms than consumer debt (home equity credit lines) o Tax Favored o Longer term o Lower interest rate Two Elements of a Mortgage Loan Borrower conveys two documents to lender o Note : Exact terms of the financial obligation o Mortgage : Pledges the property as security for the note The Note Interest Rates Fixed Rate o Monthly charge is 1/12 of stated annual rate o Multiplied by beginning-of-month balance Adjustable rate (ARM) o Index rate : Market-determined rate beyond control of either borrower or lender ( the moving part) U.S. Treasury Constant Maturity Rate Thrift institution cost of Funds Index LIBOR Home mortgage rate index Commercial banks prime rate o Margin : Lenders markup 200 to 300 basis points (bp) Average about 275 bps o Change Date : Date that interest rate changes each time New index rate commonly is the last published rate IE: rate published 45 days before the change date o Teaser rate : Initial temporarily reduced interest rate (maybe 1-2% below index + margin) o Interest rate caps : Limit on changes in interest rate charged (higher or lower ) Periodic (from one change date to next) Lifetime Important question: does cap apply to the teaser rate? o Payment caps : Limit on payment changes rather than interest rate changes Can result in negative amortization: Unpaid interest added to the balance Payments Always in arrears (end of month) Virtually always monthly Commonly level payment & fully amortizing Various arrangements for fixed-rate loan : o Level payment o Partially amortized (term for amortization, term to maturity, balloon loan) commercial loans o Interest only nonamortizing; sometimes called a bullet loan o Negative amortization The Note: Right of Prepayment Traditional : No right of prepayment unless explicitly provided Modern statutory case : Right of prepayment unless explicitly prohibited Loans with right of prepayment : o All conforming and FHA/VA loans o Home equity credit lines Loans with restricted right of prepayment: o Subprime home loans o Jumbo home loans 2006: $417,000, or $625,000 in Alaska, Hawaii, Guam, and the U.S. Virgin Islands o Most income property mortgage loans o Prepayment penalties: Percentage of outstanding balance Yield maintenance- can prepay balance but must pay PV (as defined in note) of the interest income that will be lost by the lender due to prepayment Defeasance- can prepay but must offer lender some combination of US treasury securities that replace the CD of the loan being paid off....
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This note was uploaded on 04/05/2008 for the course REAL ESATE 306 taught by Professor Mccabe during the Spring '08 term at Wisconsin.
- Spring '08