revised: 7-30-08 chapter 15 slide #1 copyright – david a. mcgowan all rights reserved chapter 15...

Revised: 7-30-08 Chapter 15Slide #1

Copyright – David A. McGowanAll rights reserved

Chapter 15

REAL ESTATE FINANCING: PRINCIPLES

Mortgage (Page 295)

Use of real property as collateral for a loan

Hypothecation (Page 296)

Pledging of real property as collateral for a loan

Terms



TERMS

Mortgagor – giver of the mortgage

Mortgagee – receiver of the mortgage

Principle – the sum of money due the lender

Interest – a charge for using lender’s money



Term – # of years granted to repay the loan

Rate - the percentage of annual interest charged by the lender

Impound or Escrow Account – Lender holds funds for taxes & insurance

Usury – maximum interest rate a lender can charge legally

TERMS



THEORIES (Page 295)

Title Theory

Lien Theory

Lender - legal titleBorrower - equitable

title

Lender - LienBorrower – legal &

equitable title

Illinois

Intermediate theory



FORECLOSURE (Page305)

Nonjudicial foreclosure

No court involvementPower of Sale Clause

Judicial foreclosureCourt authorizationProperty sold at public auction

Strict foreclosureCourt authorizationProperty awarded to lender



FORECLOSURE TIMELINE

Notice Publication Deed

Sherriff’s Deed

CourtAuctionCourt

Statutory Right of Redemption

Equitable Right of Redemption

Statutory Right of Reinstatement

1. Court order of Foreclosure2. Deficiency Judgment

Certificate of Sale

REO – Real Estate Owned – foreclosed property acquired by the lender

upon receipt of the sheriff’s deed.

Lis Pendens



MORTGAGE LOAN INSTRUMENTS

Promissory Note

Mortgage Contract2 party agreement

Deed of Trust3 party agreement

Security Instrument

Debt Instrument



DEED OF TRUST (Page 296)

Trustor

CreatorRights

TrusteeLegal Title Holder

BeneficiaryLender

“Power of Sale”

Trust Agreement



DEED OF TRUST (Page 296)

Trustor

Trustee

Beneficiary

Deed in Trust is a deed – Deed of Trust is a relationship

Deed Review



MORTGAGE CONTRACT

Acceleration Clause (Page 295)

Defeasance Clause (Page 295 & 302)

Satisfaction of Mortgage – Mortgage Contract

Deed of Reconveyance – Deed of Trust

Prepayment Clause (Page 299)



Duties of the mortgagor (Page 300)

Payment of debt

Payment of real estate taxes

Maintenance of adequate insurance

Maintenance of the property

Consent to make alterations

MORTGAGE CONTRACT



Assignment of the mortgage

Assignment of rents

Alienation ClausePrevents an assumption

Prevents selling “Subject To”

MORTGAGE CONTRACT



MORTGAGE INTEREST CALCULATIONS

Straight LoanInterest onlyBalloon payment of entire principle at the end of the term

Amortized LoanDirect reduction loanPayment is part principle and part interest



INTEREST CALCULATIONS

Straight v. Amortized



Purpose - retain the same yield earned on a mortgage loan while lowering the interest rate to benefit the borrower

Borrower can afford more property with a lower interest rate

DISCOUNT POINTS (Page 299)



DISCOUNT POINTS (Page 299)

6 987

Each space = 1 discount point1 discount point = 1% of the mortgage amount

%% %%

Math Calculation

Current Rate = 8.25%Desired Rate = 7.5%

7.5% 8.25%

1 2 3 4 5 6



PROMISSORY NOTE (Page 297)

Amount of the debt

Time and method of payment

Rate of interest

Note is a negotiable instrument



WHY DOES THE LENDER SELL YOUR

PROMISSORY NOTE

$200,000 @ 8% interest for 30 years

$16,000 earned in 1st year

12.5 years to recapture the $200,000



Face Value of Note

$200,000

Lender receives 95%

$190,000

Investor collects $200,000 from

borrower

Makes $10,000 profit


PROMISSORY NOTE



8% Interest Rate


PROMISSORY NOTE

Lender collects 2% of mortgage amount $4,000 in 1st year

Investor collects 6% of mortgage amount $12,000 in 1st year



$16,000

#Loan

AmountInvestor Share

Lender Share

1 200,000 12,000 4,000

2 190,000 11,400 3,800

3 180,500 10,830 3,610

4 171,475 10,289 3,430

5 162,901 9,774 3,258

6 154,756 9,285 3,095

7 147,018 8,821 2,940

$24,133

Total interest in Year 1 - $51,321

$75,471


PROMISSORY NOTE

revised: 7-30-08 chapter 15 slide #1 copyright – david a. mcgowan all rights reserved chapter 15...

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