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Posted on October 24, 2007 by Jason Petrina | Posted under Real Estate
Making Sense of Real Estate Financing Terms
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First of all it's important to understand that only in very rare circumstances is real estate purchased with cash. Most people simply do not have the funds on hand to do so and must rely on some form of financing in order to complete a desired real estate transaction. In the case of a home purchase, this results in a mortgage loan. In this type of situation, the prospective home owner borrows most of the funds needed to purchase the home and pledges the property he is purchasing as security, or collateral, for that loan. Since banks and lenders do not simply give away money, a prospective homeowner will need to complete an application for credit. The typical information requested on this application will include the amount of money requested, the purpose of the loan, and other data that will be used by the lender to make a decision regarding whether the bank will loan the applicant the money or not. Such information might include employment, earnings, assets and any other relevant financial obligations. In the event that the loan is approved, the borrower will then be required to sign to instruments or documents. One of these is known as a promissory note and it is an agreement to repay the amount borrowed to purchase the home. Although there are different options for repayment, most loans take on the form of monthly installments with interest. The terms of the payments will be spelled out precisely and exactly in the promissory note. The second document, the mortgage or deed of trust, will create a lien on the property as security for the debt. It is important to understand that even if the homeowner later defaults on the loan, or is unable to make the payments as promised, the lender will retain the right to take the property as compensation for the debt owed. While all mortgage loans must eventually be paid back, there are numerous ways in which a homeowner can do this. The three most common repayment plans are a fully amortized payment, a flexible payment and a balloon payment. A fully amortized loan payment is a very popular and traditional choices and allows homeowners to payback their mortgage loan in equal installments; usually on a monthly basis. The flexible payment option is advantageous to younger home owners because it gives them the opportunity to make lower monthly payments for the first few years of the loan; after which time the payments will increase. The balloon payment is quite similar to the fully amortized payment, except that the final payment is typically much larger than previous payments. Homeowners will also hear quite a bit about the escrow account during the home buying process. This is an account that acts as a reserve fund in order to meet future real estate expenses such as taxes and insurance premiums. Many lenders require an escrow account to ensure that such financial obligations are not neglected by the homeowner, because failure to take care of them could put the property and the bank's investment in the property at risk. The escrow account is usually implemented at the beginning of the mortgage loan by a deposit from the borrower. Depending on the arrangement with the lender, the monthly loan payment may then include the principal of the loan, interest, real estate taxes and insurance premium. About The Author: Jason Petrina is the Editor and Publisher of Article Click. For more FREE articles for your ezine and websites visit - www.articleclick.com |
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