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Feb 06

Demystifying the Lending Jargon – Critical Lending Terms You Should Be Aware Of – Rich Investor Series

 

If you thought that becoming a rich real estate investor is an easy thing, wait until you get hold of a contract or you start looking for funding and you are met with complex jargon. There is a whole new language awaiting you in the real estate finance world that you ought to be aware of if you are to become a smart investor.

 

Take your time to learn the meaning of at least the most important terms so you can start shopping with some background knowledge to avoid being swayed away or taken advantage of. Getting armed will also help you ask questions and clarify any issues that you could be having with the details still fresh in your mind. Here are some basic terms to get you started.

 

Balloon Mortgage

This is a type of mortgage loan where the full balance is often due at a specified date in the future. While you could be making regular payments on a monthly basis, these payments will eventually be calculated based on a longer period of time, and eventually the payments will come to a stop and the outstanding balance become due. For example, you invest in a property where the monthly payments are calculated for a typical 25 or 30 year tenure.

 

However, instead of servicing the loan for that period of time, the outstanding balance can be due after 5 or so years. This type of mortgage is quite risky unless you are 100% sure you will have enough money on the specified due date to make a full payment or are certain on the due date you will qualify for another loan to buy off the old one.

 

Amortization

Amortization is a type of loan whereby the regular payments you make on the loan, part of it is channeled towards the interest and the other part is channeled towards the principal outstanding balance. There is something known as negative amortization where the amount payable on a monthly basis is not enough for both the interest and principal amount. In such a case, the unpaid interest is often pegged on the outstanding principal balance for each subsequent month, eventually increasing the total outstanding balance.

 

Mortgage

This is not a loan, technically speaking. It is more or less of a security instrument, a legally binding document that states that the property being bought will act as collateral for the funding/loan. In other words, when you get a mortgage for a property, the property will be collateral for the cash you will have borrowed to buy it.

 

Deed of trust

This is a special type of deed that mandates someone to hold on to a title deed for a property in question, albeit temporarily. A deed of trust serves the same purpose as a mortgage, only that it is easier and faster to foreclose.

 

Note that when a mortgage is combined with a promissory note, the investor promises to pay back the lender as per the agreed terms and conditions of the loan in question. The mortgage therefore creates a lien should you not honor your end of the deal.

 

Lien

This is a legal right to sell or keep another person’s property as collateral for a debt.

 

The real estate finance world is a very dynamic and ever changing field with new terms, guidelines and new types of loans changing constantly to meet the growing needs and demands for borrowers. Get a loan officer whose opinions and judgment you value and work with them to gain a clear understanding of the loans applicable to the type of real estate investment that you wish to get into.

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