Most loan programs are known as Amortized Loans. With an amortized loan, the payments apply toward interest charges as well as paying down the debt or principal. With each payment the debt is reduced and therefore the interest expense is reduced after each payment as well. This is how it works:
Level Payment Amortized - This form can be "averaged-out" over the length of the loan to create a Level Payment Amortized loan. Rather than start out with a high payment and pay a reduced amount each year, the debtor/borrower simply pays a level amount each year.
When you see the word blanket, this means that the loan is covering several different properties at once. Blanket loans are mainly used with commercial loans for businesses that need to own several different locations. Blanket loans are popular with builders and developers who buy large tracts of land, then subdivide them to create many individual parcels to be gradually sold one at a time.
Combined Payment - Each amortized loan payment is securing two or more pieces of real property under the blanket loan document.
Release - Since the owner might want to sell one of the blanketed pieces of real property, the blanket loan has a release (partial release) clause.
Release Clause - Any parcel that is under the blanket and sold, can be released under the release clause.
When a person purchases a furnished condominium, the purchase includes personal property such as the furnishings, appliances, patio furniture, etc. The Package Loan pays for all of this as well as the condominium unit. This type of loan is secured by the real property (condominium) and the personal property (furnishings). It has the following characteristics:
A balloon loan is not utilized very often. The reason is that it requires the debtor to make a large final payment at the end of the loan contract. A balloon loan would be used by someone who doesn't plan to stay with the property for very long such as 5 years. The payments are lower than a standard amortized (level payment) loan where the debt is completely paid off at the end. If the owner sells 5 years into the loan, the sale proceeds would simply pay off the loan. If the owner doesn't sell, the owner would have to make a balloon payment at the end of the loan contract or refinance with another loan.
Different Than an Amortized Loans - A balloon loan is just like most loans in that it has a series of payments like an amortized loan, but it will have one very large payment at a specific future date which is usually at the end of the loan.
Open End Loan
This is utilized by contractors when building a speculation (spec) home that they plan to sell when it is completed. The contractor is given a line of credit up to a maximum. The contractor can utilize the money in any amounts, at any time, but never more than the credit limit set by the lender.
Open End - An Open End Loan is an amortized loan where the borrower can borrow amounts as needed up to a stated maximum. The borrower pays interest on the loan balance outstanding at the end of each month.
No Time Limit - There is no time limit on the loan outstanding. The business can continually use the loan money as needed in the course of business
Interim Loan (Construction Loan)
This loan is utilized by homeowners or contractors during the construction of a single new home. It is like a "line-of-credit." The lender sets a maximum dollar amount that can be used. The borrower/debtor utilizes money from this loan and pays expenses as needed.
Requirements - Money involved with the home construction are disbursed at specified intervals of construction. The money are loaned by the lender after certain points of construction are completed.
Owed Interest - Interest is only paid on the amount of money that has been disbursed by the lender.
Final Payment - The final payment is made after the mechanics/construction lien period expires or the contractor lifts the lien on the property.
Holding Agreement - If the contractor does not want to make loan payments on the spec home, the lender will require a "holding agreement" on the entire property until the lender gets paid in full upon sale of the property by the contractor.
High Interest Rate - This interim loan has a very high interest rate because it is high risk (contractor could mess things up). It is based on one single project, a paper work nightmare at the end of each month, and short term/temporary form. It is often called a Floor Loan because some will automatically transform into a mortgage loan when construction is completed.
Not Assumable - An interim loan is not intended as a permanent, long-term financing vehicle. Once the financed project is completed, the owner will replace it with a "Take-Out Loan" (permanent financing).
Gap Loan/Bridge Loan
This is usually utilized for difficulties in financing. The borrower is having problems and needs a "temporary" loan to bridge the gap between now and when things are better.
Loan Replacement - The gap (or interim) loan is to be replaced. The borrower goes from a high interest rate (the interim loan) to the normal lower mortgage interest rate.
Permanent Loan - At completion of the construction project, the permanent lender commits to "take-out" the original temporary lender by eliminating the interim loan with a permanent replacement loan.
Variable Rate Loan
Any of the former loans that we discussed could be set up on a variable rate basis. That is, the interest rates will change throughout the loan period. These variable rate loans came about when interest rates went up to as much as 15%. The lenders were stuck with old mortgage interest rates of 5% to 7%. They were upset because they could be earning 15%. So to countermand this situation, the lenders came up with variable rate loans to protect their interest. There are two types of variable rate loans; Indexed Rate and Fixed Rate.
Interest Rates Indexing - These types of loans allow the interest rate to increase or decrease based on some cost index.
Monthly Mortgage Payments - Obviously, if interest rates go up with an amortized loan, the payments per month would go up as well.
Escalator Clause - The Variable Rate Loan has what is called an Escalator Clause. This clause allows the lender to increase the interest rate and, therefore, the monthly payment.
Fixed Variable Loans - Some Variable Rate Loans are set in concrete. They start out at a low rate and then contractually increase regardless of outside influences.
Adjustable Rate Mortgage (Or ARM) Loan
This form of loan gives the lender the right to periodically adjust the interest rate based on the cost of funds that it has to pay the Federal Government. It is a specific form of a Variable Rate Loan. Prior to the ARM loans, the variable rate loans would increase drastically all at once. If interest rates went up 50%, the mortgage payment would go up 45%. With complaints from the public sector, the banks came up with ARM Loans to cushion any dramatic increase of interest rates. Sometimes is referred to as an "Adjustable Rate Loan."
Index Based: The ARM loan is adjustable by the lender. The adjustment is based on an INDEX that is a readily available statistical indicator as far as the cost of money. It is sometimes referred to as a Renegotiated Rate Mortgage.
Large Jump - If interest rates went up 5% in quarter, the lender could not go up greater than the Rate Cap for its specified period.
Careful - Some life of loan caps have no limit. What happens is that if interest rates go up, the mortgage/debt starts increasing. Instead of the mortgage payments going up, the debt goes up.
Wrap Around Loan (All Inclusive Loan)
This is the concept of having all your debts rolled into one mortgage and only having to pay one payment per month. This type of loan is used frequently as a method of refinancing property or financing the purchase of property when an existing mortgage cannot be paid off. The total amount of a wraparound mortgage includes the previous mortgage's unpaid amount plus the additional funds required by the borrower. The borrower makes payments to the new lender on the larger loan, and the new lender makes payments on the original loan
Pays Off Balance - The Junior loan that will take over the balance owing on all the previous loans.
Responsibility - What this does is solve the Subordination and Prior Mortgage Clause problems. The second (2nd) mortgage holder pays off the first (1st) mortgage holder or simply agrees to make the remaining mortgage payments to the 1st mortgage holder.
Simpler - The mortgagor simply takes one mortgage payment to the second lender and the second lender makes payment to first lender. This often times frees up cash for the owner.
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