A PLUS SCHOOL

REAL ESTATE PRACTICE LESSON 3 FINANCE CONTINUED Primary and Secondary Markets

• primary market sometimes called the primary mortgage market is where lenders provide money to borrowers • secondary market primary lenders sell their loans in the secondary market as a way to obtain money to make loans. Federal Reserve System is the manager of money in the U.S. and is responsible for maintaining conditions that check inflation and favor acceptable employment rates and economic growth. Its primary influences upon the real estate industry is its control of the supply and cost of money and credit (interest rates) Truth-In-Lending (Regulation Z) Regulation Z applies to all loan secured by a residence. Its provisions cover the disclosure of costs, the right to rescind the credit transaction, advertising credit offers, and penalties for non-compliance with the act. a lender must disclose all finance charges as well as the true Annualized Percentage Rate (APR) in advance of Rescission. A borrower has a limited right to cancel the credit transaction, usually within 3 days of completion of the transaction. The right of rescission does not apply to “residential mortgage transactions,” that is, to mortgage loans used to finance the purchase or construction of the borrower’s primary residence. • Advertising Any type of advertising to offer credit is subject to requirements of full disclosure if it includes, a down payment percentage or amount, an installment payment amount, a specific amount for finance charge, a specific number of payments, a specific repayment period and a statement that there is no charge for credit. If any of these items appears in the advertising, the lender must disclose the down payment amount or percentage, repayment terms, the APR, and whether the rate can be increased after consummation of the loan. • Noncompliance Willful violation of Regulation Z is punishable by imprisonment of up to 1 year and/or a fine of up to $5,000. Other violations may be punished by requiring payment of court costs, attorney fees, damages, and a fine up to $1,000. Equal Credit Opportunity Act

ECOA prohibits discrimination in extending credit based on race, color, religion, national origin, sex, marital status, age, or dependency upon public assistance. A creditor may not make any statement or discourage an applicant concerning these discriminatory terms A lender must also inform a rejected applicant in writing of reasons for denial within 30 days. A creditor who fails to comply is liable for punitive and actual damages. Discounts Points

• Discount points, or simply points, are a one-time fee paid up front, that is at the time of loan origination, in return for the lender giving the borrower an interest rate lower than the market rate, or in anticipation by the lender of the discount that will be required when selling the loan in the secondary money market • One discount point equals one percent of the loan amount (including private ) Loan-to-Value Ratio

• is the relationship between the loan amount and the market value of the . It is the loan amount divided by the market value or the L/V ratio. • Lenders often talk about the loan-to-value ratio on the amount of money they will lend relative to the estimate of the market value of the property that will be the for the loan. • For example, if a buyer wants to purchase a home with a market value of $100,000 and the lender will make up to an 80% loan-to- value loan, the lender will lend 80% of the $100,000 or $80,000. The L/V ratio, then, is $80,000/$100,000 or 80%. Thus the buyer's down payment would be $20,000. Equity

• is the difference between the value of a property and the amount owed on it. • For instance, if a home has a market value of $100,000 and the loan against it is $80,000, the equity is $20,000. Equity is a dynamic feature. As the loan against the property is paid down, equity increases, and as the property's value rises and falls with market fluctuations, equity changes. • If there is no loan against the property, equity equals market value. Loan Origination Fee

Simply stated, a loan origination fee is a charge for making a loan. It is a fee charged by the lender to the borrower for processing a loan application It pays for the loan officer's interviewing the potential borrower and doing the loan application itself, for office overhead, for compilation and analysis of the documents required to review the borrower's background, for title reviews, and so on The fee with government loans is always one percent. The loan origination fee is paid on the amount of the loan before the mortgage insurance premium is paid, not on the price of the Types of Loans

• Term Loan also called a straight loan, requires only interest payments for a specific period of time, after which the entire principal balance is due. • Amortized Loan is one that is repaid in a specified period of time with fixed payments in an amount sufficient to pay the interest due and to reduce the principal to zero by the loan's maturity date. Since the payments remain the same for the life of the loan, and the principal balance is reduced with each payment, the amount going to interest decreases with each payment and the amount going to principal increases. • Budget Loan is an amortized loan in which the lender in addition to collecting for the principal and interest (P and I) also collects for the property taxes and hazard insurance on the mortgaged property. Thus the loan payment contains the payment of principal, interest, taxes, and insurance (PITI) and is often called a PITI loan

• • Package Loan is one that finances both the and personal property that is essential to being able to live in the property, such as stoves, refrigerators, etc. The mortgage or trust names the articles and defines them as fixtures. • Purchase Money Loan is to purchase real property that serves as collateral for the loan. That is, the loan to buy the property is secured by a mortgage on the property. A purchase money loan may be a first or a junior lien. For example, when a buyer purchases a property by assuming a first mortgage and having the seller carry a second mortgage secured by the property, the second mortgage is a purchase money mortgage because it is secured by the property purchased, and it is a junior lien because it is in second position. • Hard Money Loan is given to finance something other than the property that is mortgaged • Open Ended Mortgage provides security not only for the original loan, but also for future advances of money made under the original mortgage. By this instrument, the borrower can borrow additional funds, up to the original loan amount, using the mortgage or trust deed already in place as security. Home equity loans are often of this type. • Construction Loan also called interim financing, is an open-ended , usually for a short term, to finance the construction of a building. Interim financing covers from the time construction begins until the loan is replaced by permanent financing at the completion of construction • Take Out Loan Construction loans are for short periods of time, perhaps for six months, for example. The take out loan is a permanent mortgage obtained at the same time as, or before the construction loan, to repay the interim mortgage at the completion of construction • Blanket Mortgage is one secured by more than one property. This kind of mortgage is characteristically used by developers who obtain a parcel of land, execute a mortgage or trust deed, then subdivide the parcel into lots, build a house on each lot, and sell the lots to individual buyers. So that each lot can be released from the lien as it is sold, a partial release clause is contained in this type of mortgage. • Adjustable Rate Mortgage With an adjustable rate mortgage (ARM), also referred to as a variable rate mortgage, the interest rate can shift up or down at certain intervals over the life of the mortgage. Interest shifts are tied to the fluctuation of an indicator outside of the lender's control, such as the prime rate offered by banks, the consumer price index, or treasury bills • An obvious disadvantage of an ARM to a borrower is that if interest rate increase, so does the payment • Graduated Payment Mortgage (GPM) loan is a fixed-rate loan with monthly principal and interest payments starting below what is required to amortize the loan and increasing by a certain amount for a scheduled number of years to a point where they are sufficient to fully amortize the loan and where they remain for the rest of the life of the loan. • Note that unlike the ARM, the GPM is a fixed interest rate loan in which the monthly payments start low and increase. • Buydown programs enable loans to be made at below market interest rates by paying front-end (up-front) discount money. • Buydowns are often made by builders. For instance, a builder may have a number of homes for sale at a time when interest rates are 12 percent. • With 12 percent interest rates, the number of buyers may be limited. In this case, the builder can pay the lender an up-front sum of money called discount points to reduce the interest rates to buyers of their homes QUIZ TIME CHECK TO SEE WHAT YOU KNOW

• Take Real Estate Practice Lesson 3 Quiz 1