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The Real Estate Mortgage industry is constantly changing with new products and old ones improved.  The following is a primer compilation of concepts by the President of the firm, Al Som-Anya, which you should be aware of, especially if you are new to Real Estate.

 

  1. What is a mortgage:  A mortgage is a mechanism of using property (real or personal) as security for the payment of a debt.  In most jurisdictions mortgages are robustly associated with loans secured on real estate rather than personal property.  A mortgage creates a lien on the mortgaged property. Foreclosure of that lien almost always requires a judicial proceeding declaring the debt to be due and in default and ordering a sale of the property to pay the debt.

 

  1. The Deed of Trust:  The deed of trust is a deed by the borrower to a trustee for the purposes of securing a debt. In California, it also creates a lien and not a title transfer, regardless of its terms. It differs from a mortgage in that, in many states, it can be foreclosed by a non-judicial sale held by the trustee. It is also possible to foreclose them through a judicial proceeding.

 

  1. Mortgage loan types:  There are many types of mortgage loans. The two basic types of amortized loans are the fixed rate mortgage (FRM) and adjustable rate mortgage (ARM). 
    1. Fixed Rate Mortgage (FRM): In a FRM, the interest rate, and hence monthly payment, remains fixed for the life (or term) of the loan, usually for 10, 15, 20, 30 or 40 years (15 and 30 being the most common).
    2. Adjustable Rate Mortgage (ARM): In ARM, the interest rate is fixed for a period of time, after which it will periodically (annually or monthly) adjust up or down to some market index. Common indices in the U.S. include the Prime Rate, the London Interbank Offered Rate (LIBOR), and the Treasury Index ("T-Bill"), Cost of Funds Index, COSI, and MTA.

 

  1. Different Mortgage Types:  You should also be very familiar with these types of loans;
    1. Balloon mortgage: A “Balloon mortgage” is a non-amortizing loan; this means the balance becomes due at the end of the period. Unlike many other mortgage loans, a balloon mortgage loan is not paid off at the end of the loan term. At the end of the loan’s term, a portion of the principal remains and comes due in a single payment. In this type of mortgage loan, you will be assessed a series of equal monthly payments, and the borrower will have to make a large final payment, which is called the balloon.
    2. Equity Loan: An equity loan is a mortgage placed on real estate in exchange for cash to the borrower. For example, if a person owns a home worth $300,000, and owes only $100,000, they may take an equity loan in cash of $100,000 in exchange for a lien on title placed by the lender of the equity loan.
    3. Hard Money Loan: A hard money loan is a specific type of financing in which a borrower receives funds based on the value of a specific parcel of real estate. Hard money loans are typically issued at much higher interest rates than conventional commercial or residential property loans and are almost never issued by a commercial bank or other deposit institution.  Washington Financial  offers hard money loans for its clients, pulling from investors and partners.
    4. Jumbo Mortgage: A jumbo mortgage is a mortgage with a loan amount above conventional loan limits. Jumbo mortgages apply when agency (FNMA and FHLMC) limits don't cover the full loan amount. Fannie Mae (FNMA) and Freddie Mac (FHLMC) are large agencies that purchase the bulk of residential mortgages in the U.S. They set a limit on the maximum dollar value of any mortgage they will purchase from an individual lender. As of 2006, the limit is $417,000, or $625,500 in Alaska, Hawaii and the U.S. Virgin Islands. This leaves a portion of the market to look elsewhere for placement. Other large investors, such as insurance companies and banks, step in to fill the need with maximum mortgage amounts going to the $1 million or $2 million range.
    5. Participation mortgage:  A participation mortgage is a mortgage wherein the lender, or mortgagee, is entitled to share in the rental or resale proceeds from a property owned by the borrower, or mortgagor. A participation mortgage may or may not require principal and interest payments, and may or may not contain a balloon payment.
    6. Reverse mortgage:  A reverse mortgage is a type of loan available to seniors (62 and over), used as a way of converting their home equity (the value of the home, minus the amount of any existing mortgages) into one or more cash payments while retaining ownership of the property (continuing to live there) and avoiding monthly payments. Repayment of the loan is deferred until the borrower is no longer living in the home.
    7. Seasoned Mortgage:  Mortgage which has been paid in a timely manner by Mortgagor, typically for no less than six months, often for more than one year.
    8. Interest Only loan: An interest-only loan is a loan in which for a set term the borrower pays only the interest on the principal balance, with the principal balance unchanged. At the end of the interest-only term the borrower may enter an interest-only mortgage, pay the principal, or (with some lenders) convert the loan to a principal and interest payment (or amortized) loan at his/her option. 
    9. Negative Amortization loan:  Negative amortization, is an amortization method in which the borrower pays back less than the full amount of interest owed to the lender each month. The shorted amount is then added to the total amount owed to the lender. Also known as deferred interest or Graduated Payment Mortgage (GPM).  This product has been very popular in the last few years, and some critics argue it has been the fuel of the last surge in real estate between 2000 and 2005.
    10. Option ARM:  An option ARM allows the borrower the option to pay as little as a 1% interest rate. As a result, the difference between the payment and the interest on the loan for each month becomes negative. The option ARM gives you four payment choices each month (a smaller interest, say 1%, interest only, 30 year fixed rate, 15 year fixed rate). The interest rate will adjust every month, depending on which index the loan is tied to. These loans are useful for people who have a lot of equity in their home and don't want to pay higher monthly costs, as well as investors, allowing them the flexibility to choose which payment to make every month.