RESA Finance
buyer do not have the sufficient fund to pay the equity difference of
FINANCING is the process of borrowing or lending funds or capital.
It involves various decision-making such as what type of capital or
its best proportion to use in a real estate investment
INTEREST is defined as the amount paid or cost for the use or
borrowing of money. It is computed at an interest rate of the money
borrowed or principal amount.
DEFEASANCE a provision in a mortgage contract which releases the
property from the encumbrance when the obligation is fully paid
With the inflation as a build0in factor, the real rate of return plus
projected inflation rate will now determine the RISK-FREE RATE OF
RETURN
The usual benchmark for the risk-free rate of return is the 91-DAY
TREASURY BILLS
FINANCIAL LEVERAGE is the use of fixed cost borrowings to finance
acquisition of assets to enhance expected return on equity
POSITIVE LEVERAGE there is positive leverage when the yield or
return on equity was increased after borrowing or when the return
on borrowed funds exceed the after tax interest cost
NEGATIVE LEVERAGE when borrowed funds cost more than they
produce
MORTGAGE refers to the legal instrument that pledges real estate
or services as security for an obligation, which is the payment of
debt by a borrower. The debt is evidenced by a promissory note. In
case of default on the part of the borrower, the pledged property or
collateral would be foreclosed by the lender.
RISK is the possibility that what is expected to occur may not occur
or that the expected outcome may be different from what is
expected
FINANCIAL INTERMEDIARIES such as banks, loan associations, and
pension funds operate as brokers who bring savers and borrowers
together. They usually perform this function more efficiently and
cheaper than that of an individual saver looking for a qualified
borrower or vice versa. They have developed a level of expertise
that eliminates the borrower and saver’s inconvenience of being
involved in direct transactions. The difference in the rate of saving
and lending interest is the profit they make.
The PRIMARY MORTGAGE MARKET is composed of lenders that
originate the loan and the ultimate borrowers of this loan while the
SECONDARY MORTGAGE MARKET deals with the buying and selling
of mortgages that have been originated in the primary mortgage
market.
INSTALLMENT SALE FINANCING is a financing situation where the
seller is the lender, usually under a Contract to Sell where the seller
retains title to the property until full payment. Other forms are rent-
to-own, lease/purchase and other marketing scheme
JUNIOR MORTGAGES – all mortgages placed subsequent and
subordinate to the first mortgage. Their claim to the property
collateral is junior to that of the first mortgage. Commonly used in
the financing of the purchase of real estate in cases where the
the first mortgage and the selling price. A mortgage lender may loan
the shortage under a second mortgage or the seller himself grants
the second mortgage.
ASSUMPTION FINANCING is the taking over of an existing mortgage
by a buyer of the collateral-property. The difference between the
selling price and the amount of mortgage is paid to the owner and
the existing mortgage is assumed by the buyer. This is attractive to
the buyer only if the interest has risen, that is, the interest on the
new loan is higher than that of the existing mortgage
DUE ON SALE stipulates that if the property is sold the balance of
the mortgage shall immediately become due and payable. This is
sometimes circumvented adopting a long-term lease with option to
buy contracts instead of deed of assignment.
RULE OF 72- Rule of thumb method to determine how long it will
take to double an investment in a given number of periods. Rate of
Return/72 =PERIOD, 72/PERIOD=Rate of Return
RULE OF 116 – The same as rule of 72, only this time the investment
is to triple
RULE OF 144 – Rule of thumb method to determine how long it will
take to double regular periodic investment at a given rate of return
or at what rate of return will regular periodic investment double.
VARYING RATE MORTGAGE is a mortgage where the nominal
interest rate can be adjusted periodically in accordance to a given
specific reference point or index to take care of the changes in
inflation rate.
The REFERENCE POINT OR INDEX is usually the published rate of the
91-day Treasury bill and interest rate for the next period may go up
or down depending on the movement of the specified index. The
varying rate mortgage is a good alternative for borrowers seeking
lower interest rate. The interest is lower than fixed rate mortgage
because the risk for inflation rate adjustment and sudden increase
in rate is taken out
ADJUSTABLE RATE MORTGAGE is a mortgage where interest rate is
adjusted, level of payment and/or maturity term is adjusted in
accordance to the variation of a certain pre-agreed index
MARGIN is a certain percent added to an index rate to establish the
interest rate of a mortgage. This is similar to mark-up which includes
the profit taxes, operating cost, etc. of the lender
NEGATIVE AMORTIZATION is a situation where a negative
amortization may occur when the interest rate went up by so much
requiring an increased periodic payment. However, if there is a cap
on payment, it is possible that the new periodic payment, as limited
by the cap, is lesser than the interest amount that should be under
the new interest rate. As such, the periodic payment being less that
the interest amount for the period, there would be an increase in
the outstanding balance for each period