Loan Terms

Amortization is a gradual reduction of a loan debt through periodic installment payments of principal and interest. Amortization is a gradual reduction of a loan debt through periodic installment payments of principal and interest calculated to pay off the debt at the end of a fixed period.

A fully amortized loan will be completely paid off at the end of the loan term.

A balloon loan would be an example of a partially amortized loan. It is considered partially amortized because at the end of the loan term the entire debt is not fully paid. Thus one huge payment would be due at the end of the term, which would be the balloon payment.

A buy down is obtaining a lower interest rate by paying additional points to the lender. The lower rate may apply for the full duration of the loan or for just the first few years. A buy down may be used to qualify a borrower who would otherwise not qualify. This is because a buy down results in lower payments, which are easier to qualify for.

Equity is the interest or value remaining in property after payment of all liens or other charges on the property. An owner's equity is normally the monetary interest over and above the mortgage indebtedness.

For example, if your home is worth $300,000 and you have $200,000 in debt, you would have $100,000 in equity. Simply said, it’s the money left over after you sell a house that you could use to go buy cookies.

Owners can negotiate a home equity line of credit, also known as a HELOC, against the equity. The home equity usually has a set limit, and can be used by an owner much like a checkbook account or a credit card. Typically the payments are interest-only and the principal amount is due at the end of the loan term.

An adjustable rate mortgage, more commonly known as an ARM, is a mortgage with an interest rate that changes over time in line with movements in the index. The interest rate is determined by the index plus the mortgage. A margin which represents the lender's profit and the cost of doing business will remain constant over the life of the loan. An adjustable rate mortgage will contain a rate cap. The rate cap will limit the adjustments that can change over the life of the loan. A payment cap is the maximum adjustment amount for a payment, while an adjustment period indicates how often a rate can be changed.

A blanket mortgage covers more than one parcel in a lot and may be negotiated by a developer.

A release clause is a provision found in many blanket mortgages enabling the mortgagor to obtain partial releases of specific parcels from the mortgage upon payment.

A growing equity mortgage is also known as a rapid payoff mortgage. When borrowers negotiate a growing equity mortgage they know the monthly payments will increase. However the payment increase will apply directly to the principal, thus reducing the term of the loan.

A graduated payment mortgage is also known as a flexible payment plan. Payments start out low and increase, or graduate a certain percentage each year for a specific number of years. The payments then level off for the remaining term of the loan. A graduated payment mortgage can cause negative amortization. Negative amortization is an increase in the outstanding amount because a monthly payment does not cover the monthly interest due. This is dangerous because the debt increases as payments are made.

An open mortgage allows a borrower to pay off the loan before the end of the term. Thus the borrower who negotiated a 30 year fixed rate mortgage can make additional payments and pay the loan off before the 30 year term. An open end mortgage allows the borrower to secure additional funds under the original loan without redoing the original paperwork.

An open end loan is like a credit card. A credit card has a credit limit, and we can use the credit card up to that limit. If we had to complete the paperwork every time we used a credit card, we probably wouldn’t use it as often. A construction loan is an example of an open end loan; if a borrower negotiates a construction loan, the borrower will receive the money in a series of draws as each stage is being developed. The borrower does not have do redo the paperwork at each stage of construction. A construction loan is also called a short term loan or an interim loan, because the loan is only for the period of construction and is not the end loan. A borrower must negotiate a long-term mortgage upon completion of the home. This is also called a take out loan.

A package mortgage includes both real and personal property. If a furnished condo is purchased in a resort community, the borrower may negotiate a package mortgage covering the condo and the furnishings.

The term participation loan can have different meanings.
1. A loan that requires interest plus a portion of the profits as payment.

2. A loan made or owned by more than one lender; the joint investors share profits and losses in proportion to how much of the loan each owns.
In a shared appreciation mortgage loan, the lender originates the loan at a below market rate in return for a guaranteed share of the appreciation the borrower will realize when the property is sold.

A purchase money mortgage can refer to any type of financing for the purchase of real estate, but usually refers to a transaction in which there is an extension of credit by the seller to the buyer. In a purchase money mortgage, also known as a take back mortgage, the title passes at closing and the seller takes back a note for part or the entire purchase price of the property.

A reverse mortgage is a loan for home owners 62 years of age and older. There are no income or credit score requirements in order to qualify for a reverse mortgage, and there are no monthly payments made to the lender. The loan is repaid when the borrower no longer resides in the property.
If the owner does not have an existing loan on the property, they can negotiate a loan and receive a monthly payment guaranteed to them for the rest of their lives, as long as they live in the house.
They may take their money in a lump sum, open a line of credit, or a combination of both. If there is an existing lien on the property, it could be paid off by the reverse mortgage and relieve the senior from making the monthly payments.

A straight note is a mortgage where the borrower is required to pay the interest due on the principal mortgage amount during the specified term. The principal loan must be repaid at the end of the term.

A wraparound loan is a method of refinancing in which the new mortgage is placed in a secondary, or subordinate, position. The new mortgage includes both the unpaid principal balance of the first mortgage and whatever additional sums are advanced by the lender. In essence it is an additional mortgage in which another lender refinances a borrower by lending an amount over the existing first mortgage amount without disturbing the existence of the first mortgage.

In a sale-leaseback there is a simultaneous selling and leasing back of the property. The seller will become the tenant of the new owner. Hence sale-leaseback. The advantage of a sale-leaseback to the seller is that the capital gained from the sale and all future rents paid are 100% deductible. The main advantage to the buyer is they have a quality tenant at the inception of the ownership of the building.

Interest is the amount paid for the use of money, usually expressed as an annual percentage. Think of it as rent on money. You pay rent to use somebody’s property to live, as it is their resource. Interest is paying to use someone else's money, thus, rent on money.

Simple interest is the common type of interest paid on home loans. Simple interest is calculated as a percentage of the original principal amount.

Usury is the illegal act of charging extremely high interest rates on a loan. Usury is commonly referred to as loan-sharking. State usury laws determine the highest interest lenders can charge on loans. The state laws vary with each type of loan.