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 type of mortgage that generally originates at one rate of interest, with the rate fluctuating up or down during the loan term based on the movement of a published index.
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| Alienation Clause | Prevents the borrower from letting someone assume the debt without the lender's approval.
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| Amortized Loans | 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 loan | a mortgage loan that includes a final payment that is larger than the required periodic payments because the loan amount was not fully amortized.
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| beneficiary | A lender in a deed of trust loan transaction; the recipient of personal property in a will
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| debt service payment | principal and interest loan payment
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| Deed in lieu of Foreclosure | Deed that is used when a borrower has defaulted on the mortgage loan and wants to avoid a foreclosure action.
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| deed of trust | the document that pledges the property to the lender as security or collateral for a debt; also called mortgage.
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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 loan that requires a fixed amount of principal to be paid in each payment with the amount applied to interest varying as the balance is reduced
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| discount point | interest paid in advance; one point equals 1% 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 | provides when sale of property by borrower to buyer who wants to assume the loan, the lender has the choice of either declaring the entire debt to be due and payable immediately or permitting the buyer to assume the loan at current market interest rates.
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| equitable title | the right to use and possess the property as if one owns it and to demand the return of the legal title when the debt is repaid.
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| Equity | The interest or value that an owner has in property 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 | Process in which property is taken by a creditor for nonpayment of debt secured by real property.
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| graduated payment mortgage (GPM) | a flexible payment plan that allows a mortgagor to make lower monthly payments for the first few years of the loan and larger payments for the remainder of the term.
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| Grantee | The one who receives title
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| Grantor | The owner who conveys title.
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| hypothecation | the act of pledging real property as security for payment of a loan without giving up possession of the property.
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| interest | a charge for the use of borrowed money
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| judicial foreclosure | the form of foreclosure used in lien theory states; court process
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| lien theory | an older, traditional approach in mortgaging property where a two-party mortgage instrument is used as security for the debt; the borrower retains both legal and equitable title to the property.
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| Mortgage | A conditional transfer or pledge of real estate as security for the payment of a debt. Also the document creating 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 original payee's right to payment.
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| prepayment penalty clause | included in a promissory note requiring the borrower to pay a penalty against the unearned portion of the interest for any payments made ahead of schedule.
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| promissory note | written promise to repay a debt in definite installments with interest.
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| satisfaction of mortgage | a document acknowledging the full repayment of a mortgage debt
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| shared-appreciation mortgage (SAM) | a mortgage loan in which the lender, in exchange for a loan with a lower interest rate, participates in the profits (if any) the borrower receives when the property is eventually sold.
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| statutory redemption period | 10 day period after the auction in which the borrower can try to raise the necessary funds to redeem 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 | uses the three-party deed of trust instrument as security for the mortgage debt; the borrower conveys legal title to a trustee to hold for the lender until the debt is paid off. NC uses this theory.
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| usury | charging interest in excess than the maximum rate established by state law.
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| yield | the return or profit on a loan
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