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Understanding Loan Terms

In this post we will try to explain some common terms in real estate mortage loans and lending.

Interest Rate – the amount of money you have to pay in return for borrowing money. This is very important in your real estate business. Interest rates can have a great effect on your monthly payments and this in turn affects the amount of money you have to buy a property. Interest rates could also affect your cash flow – pushing you towards selling your property instead of holding it.

Loan Amortization – loans can be structured in various ways: simple interest; amortized. Simple interest loans are calculated by multiplying the loan balance by the rate of interest. An amortized loan is calculated using a far more complex formula. This kind of loan breaks down payments over a few years, and you make recurring payments monthly. Interest unlike in simple interest loans is calculated on the remaining balance.

Balloon Mortgage – this is an early end to a loan. Take for example a three-year loan that requires interest-only payments, and it is then due in full at the end of the term. This loan could also be taken as an amortized loan over a period of 20 years, with the principal balance due for payment in four years. The borrower has to pay the full amount or face foreclosure when the loan balloon payment is due.

Lenders now have on offer variable-rate financing, due to uncertain rates predicted for the future. This ARM loan has so many variations that can be tailored to suit the lender’s profit motives and the borrower’s needs as well. It has two limits on the rate increase; one which controls the limit on interest rates over the lifetime of the loan, and the other regulates the amount the interest rate can be increased at a time.