Real Estate Financing Principles
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| acceleration clause | The clause in a mortgage or deed of trust that can be enforced to make the entire debt due immediately if the borrower defaults on an installment payment or another covenant.
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| adjustable rate mortgage (ARM) | A loan characterized by a fluctuating interest rate, usually one tied to a published index. Caps for adjustments on periodic interest, lifetime interest, and payment amounts are normal.
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| alienation clause | This clause prevents the borrower from letting someone else assume the debt without the lender's approval. See due-on-sale clause.
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| amortized loan | A loan in which principal as well as interest is payable in periodic installments over the term of the loan.
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| balloon payment | A final payment of a mortgage loan that is larger than the required periodic payments because the loan amount was not fully amortized.
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| beneficiary | (1) The person for whom a trust operates or in whose behalf the income from a trust estate is drawn. (2) A lender in a deed of trust loan transaction. (3) The recipient of personal property (a bequest or legacy) in a will.
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| debt service | The principle and interest payment on a loan.
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| deed in lieu of foreclosure | A deed given by the mort-gagor to the mortgagee when the mortgagor is in default under the terms of the mortgage. This avoids foreclosure but does not remove liens from the property; "friendly foreclosure."
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| deed of trust | An instrument used to create a mortgage lien by which the borrower conveys title to a trustee, who holds it as security for the benefit of the note holder (the lender); also called a trust deed.
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| default | The nonperformance of a duty, whether arising under a contract or otherwise; failure to meet an obligation when due.
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| deficiency judgment | A personal judgment levied against the borrower when a foreclosure sale does not produce sufficient funds to pay the mortgage debt in full; a general lien.
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| direct reduction loan | A mortgage loan that requires a fixed amount of principal payment in each period; the total debt service payment starts higher than with a level payment loan since interest portion will reduce with each payment.
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| discount point | Interest paid in advance; one point equals 1 percent of the loan amount for the borrower and increases the yield for the investor approximately 1/8%.
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| due-on-sale clause | A provision in a mortgage that states that the entire balance of the note is immediately due and payable if the mortgagor transfers (sells) the property. See alienation clause.
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| equitable title | (1) The interest held by the grantor in a deed of trust that allows possession and use of the pledged property. (2) The interest held by a vendee under a con-tract for deed or an installment contract; the equitable right to obtain absolute ownership to pr
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| equity | The interest or value that an owner has in prop-erty over and above any indebtedness.
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| equity of redemption | The right of a borrower in default on a mortgage loan to reclaim the forfeited property prior to the foreclosure sale through payment in full of all debt and associated costs.
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| foreclosure | A legal procedure whereby property used as security for a debt is sold to satisfy the debt in the event of default in payment of the mortgage note or default of other terms in the mortgage document. The foreclosure procedure brings the rights of all parti
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| graduated payment mortgage (GPM) | A loan in which the monthly principal and interest payments increase by a set amount each year for a certain number of years and then level off for the remaining loan term; probable nega¬tive amortization in early years.
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| grantor | (1) The property owner that is transferring title to or an interest in real property to a grantee. (2) A borrower in a deed of trust loan transaction; also called trustor.
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| hypothecation | The pledging of property as security for an obligation or a loan without losing possession of it.
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| interest | A charge made by a lender for the use of money.
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| judicial foreclosure | The form of foreclosure used in lien theory states. See foreclosure.
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| lien theory | Some states interpret a mortgage as being purely a lien on real property. The mortgagee thus has no right of possession but must foreclose the lien and sell the property if the mortgagor defaults.
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| loan origination fee | An administrative fee charged to the borrower by the lender for making a mortgage loan; usually computed as a percentage of the loan amount.
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| mortgage | A conditional transfer or pledge of real estate as security for the payment of a debt. Also, the document cre¬ating a mortgage lien in a lien theory state
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| mortgagee/mortgagor | A mortgagee is the lender in a mortgage loan transaction; a mortgagor is the borrower in a mortgage loan transaction.
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| negative amortization | When the debt service payment on a loan is not large enough to pay the interest due; the principal balance actually grows with each payment.
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| negotiable instrument | A written promise or order to pay a specific sum of money that may be transferred by endorsement or delivery. The transferee then has the origi-nal payee's right to payment.
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| power of sale foreclosure | The form of foreclosure used in a title theory state, such as North Carolina; also called nonjudicial foreclosure.
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| prepayment penalty | A charge imposed on a borrower who pays off the loan principal early. This penalty compensates the lender for interest and other charges that would otherwise be lost due to payments made ahead of schedule.
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| principal | (1) A sum loaned or employed as a fund or an investment, as distinguished from its income or profits. (2) The original amount (as in a loan) of the total balance due and payable at a certain date. (3) A main party to a transaction the person for whom the
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| promissory note | A financing instrument that states the terms of the underlying obligation, is signed by its maker, and is negotiable (transferable to a third party); a personal IOU.
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| satisfaction of mortgage | A document acknowledging the full repayment of a mortgage debt.
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| short sale | When a lender allows a borrower in default on mortgage loan payments to sell the mortgaged property for less money than necessary to satisfy the loan to avoid the delay and expense of a foreclosure sale; lender usually "for-gives" the balance owed after t
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| statutory redemption period | Ten day period after the auction of the property
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| statutory right of redemption | The right of a defaulted property owner to recover the property after its sale by paying the appropriate fees and charges.
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| term loan | A loan in which only interest is paid during the term of the loan, with the entire principal due with the final interest payment; also called a straight loan
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| title theory | Describing those states like North Carolina that interpret a mortgage to mean that the lender is the owner of mortgaged land who vests the legal title with the trustee while borrower holds equitable title. Borrower regains legal title upon full payment of
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| usury | Charging interest at a higher rate than the maxi¬mum rate established by state law.
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| yield | The return on investment; amount of profit.
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