18 Financing Basics: Arizona Real Estate License Exam Prep

Arizona Real Estate License Test Prep: Pass the real estate exam, lots of financing vocabulary in this video. Copyright 2017 Hogan School of Real Estate, Inc. All Rights Reserved.
I. BORROWER'S MOTIVATIONS

A. Opportunity. Couldn't become a homeowner any other way.

B. Leverage: Increase in rate of return through using borrowed money.

C. Tax advantage. Interest is tax deductible.


II. LENDER'S MOTIVATIONS

A. High yield on the investment

B. Low Risk

C. Good security


III. FINANCE INSTRUMENTS

A. Promissory Note: A personal promise to repay the debt. Serves as evidence of the debt. The note states:
1. Who the lender and borrower are
2. The amount of the debt
3. The interest rate
4. The pattern of payments

NOTE: The note is usually not recorded.

B. Mortgage or Trust Deed: Hypothecates the property as collateral for the debt. Includes provisions for the lender to foreclose if the borrower is in default.
1. States the legal description of the property
2. Usually recorded by the lender to establish priority of the lien

IV. PAYMENT PLANS

A. Amortized (Fully Amortized): Level or constant payments including principal and interest (P & I).
1. Principal - the original loan amount or current balance.
2. Interest - the charge made to borrow money. In real estate loans the interest is usually simple interest.

EXAMPLE: On a $50,000 loan at 12% interest with monthly payments for 30 years calculate the:
• monthly payment,
• amount applied toward principal and interest for the first 3 months,
• remaining principal balances at the end of each of the first 3 months.

Step 1. Calculate the monthly payment. The monthly payment can be calculated by using a payment table or a financial calculator.



























FINANCIAL CALCULATOR

Loan Amount $50,000 L/A
Term 30 Term
Interest Rate 12 Int
Payment 514.31 Pmt

Step 2. Once the payment is calculated the portion of each payment applied to interest and principal and the remaining balances are calculated as follows:


Month 1
Month 2
Month 3

Principal Balance
50,000.00
49,985.69
49,971.24

Interest Rate
x .12
x .12
x .12

Annual Interest
6,000
5,998.28
5,996.55

Months per year
 12
 12
 12

Monthly interest
500
499.86
499.71






Total PI payment
514.31
514.31
514.31

Monthly Interest
500.00
499.86
499.71

Principal portion
14.31
14.45
14.60






Beginning Balance
50,000.00
49,985.69
49,971.24

-Principal portion
14.31
14.45
14.60

Remaining Balance
49,985.69
49,971.24
49,956.64

B. Balloon Payment: One payment is larger than the monthly payments. May be partially amortized with the last payment being a balloon.

C. Budget: Payments made PITI (Principal, Interest, Taxes, Insurance). Taxes and insurance go into an Escrow Account (Reserve Account or Impound Account). Lender pays taxes and insurance when due.

D. Straight: Interest only during term of loan with principal due at maturity (balloon payment). Ex. construction loans. Also called TERM loan.

E. Negative Amortization: The monthly payments are less than the interest. The interest shortage is added to the unpaid principal and the loan balance increases over the term of the loan.

NOTE: The pattern of payments, interest rate, stop date, etc., are found in the note, not in the mortgage or trust deed. Payments on real estate loans are paid in arrears.