Real Estate Loans

Objectives Describe the characteristics of a mortgage loan Explain a home-equity loan

Mortgage Loans Most expensive thing most people will ever buy…a house – Average in 2011…$266,400 Real estate is a section of land, the air above it, the ground itself, and any buildings on the land Mortgage loan – loan made to purchase real estate – Secured loan

Government-Backed Mortgage Programs Federal Housing Administration (FHA) – guarantees home loans with down payments of 3% or less – Borrower pays a mortgage insurance premium that helps support the program – FHA doesn’t actually make the loans…they just back the loans lenders make Veteran’s Administration (VA) also provide loan guarantees to qualifying veterans

Government-Backed Mortgage Programs Government National Mortgage Association also known as Ginnie Mae – government owned corporation that backs FHA and VA loans by selling bonds (called mortgage- backed securities – MBSs) that are backed by the US government

Government-Backed Mortgage Programs Government-sponsored enterprises (GSEs) – chartered and supported by the government to promote public interest…increase homeownership and affordable rental houses – Fannie Mae and Freddie Mac – These are not back by the government

Nature of Mortgage Loans Most features of mortgage loans can be negotiated by the lender and borrower…each one is different – Commercial or Loan – Mortgage Interest Rates – Terms and Fees

Nature of Mortgage Loans – Consumer and Commercial Loans Consumer loan – individuals buying a home Commercial loan – businesses or organizations buying property – Individuals can purchase real estate for commercial purposes…house can be rented to residents or serve as an office for a small business…making it a commercial loan

Nature of Mortgage Loans – Mortgage Interest Rates Most banks advertise their mortgage rates but they can be negotiated, but many factors are considered – Interest rates offered by competing banks – Whether the borrower already has an account with the bank or is willing to open an account – The length of time before the loan will be repaid

Nature of Mortgage Loans – Mortgage Interest Rates Interest rates can be fixed or adjustable – Fixed-rate mortgages – interest rate stays the same throughout the loan Benefits – lender knows exactly how much money it will earn and the lender knows exactly how much will be paid each payment until the loan is paid in full – Adjustable-rate mortgages – interest rate may change over the life of the loan…can be the same for one month or several years…common intervals are one month, three months, one year, three years, or five years Initial rate is usually lower (teaser rate) making it attractive Initial rate is usually fixed for a certain amount of time and then may change Borrowers look for a cap which is the maximum increase that can be applied to a monthly payment

Nature of Mortgage Loans – Terms and Fees Term – the number of years a loan will exist – Most are 15 or 30, but other terms are available Fees – several fees (called closing costs) are applied when a mortgage is signed – Vary from lender to lender – Most lenders will allow the closing costs to be included in the mortgage loan rather than paid directly at signing

Applying for a Mortgage Potential borrower must… – Make sure their finances are in order – Fill out a mortgage application – Provide information about income and assets – Allow lender to order a credit report/history The process then begins…usally takes one to three business days Once all has been approved, at closing (or settlement) the transfer of ownership takes place

Equity Loans Real estate has value based on the amount someone is willing to pay for the property Equity is the difference between the real estate’s value and the amount owed for the real estate Equity loan is a loan that temporarily transfers cash to the borrower – For the borrower it’s a good source of cash – For the lender it’s a second way to earn money one the same real estate

Equity Loan Characteristics Similar to a mortgage…also known as a second mortgage Like a mortgage, many characteristics can be negotiated – Consumer and Commercial – Interest Rates – Terms and Fees

Equity Loan Characteristics – Consumer and Commercial Home equity loans are common – Can be used to pay off credit cards, improve the real estate, or pay education costs Commercial equity loans are used to improve the business – The borrower could purchase additional equipment or inventory, repair or improve existing equipment

Equity Loan Characteristics – Interest Rates Usually higher than a mortgage because the equity loan is riskier – The same property is being used to secure two different loans – The first loan (mortgage) is paid before the second loan (equity loan)

Equity Loan Characteristics – Terms and Fees Have a term of 5 to 30 years In some cases a penalty may be charged for paying of the loan early Closing costs are associated with signing an equity loan…vary from lender to lender