4 Mortgages and Real Estate Finance Free Online FlashCards

What two parts connect a mortgage debt to the property?

A mortgage loan funds a real estate purchase or refinance. The borrower promises repayment, while a mortgage or deed of trust secures the debt with an interest in the property.

What does principal mean in a mortgage?

Principal is the amount borrowed or the remaining unpaid balance of the loan.

How is loan-to-value (LTV) calculated?

Loan-to-value is the loan amount divided by the property value: $\mathrm{LTV}=\frac{\text{loan amount}}{\text{property value}}$. A $\$240{,}000$ loan on a $\$300{,}000$ property has an $80\%$ LTV.

Does a mortgage’s principal-and-interest payment equal its total housing payment?

No. The total housing payment may also include property taxes, homeowners insurance, mortgage insurance, and other escrowed costs.

What happens to principal and interest shares during amortization?

Amortization is repayment through scheduled payments that reduce principal over time. Early payments devote a larger share to interest; as the balance falls, more goes to principal.

What stays constant on a fixed-rate mortgage?

A fixed-rate mortgage keeps its interest rate and scheduled principal-and-interest payment constant for the loan term. Other housing costs can still change.

How does APR differ from a mortgage interest rate?

The interest rate is the annual borrowing cost as a percentage. APR is broader: it includes the rate and certain loan charges, such as points and some fees.

How can leverage amplify both gains and losses in property investment?

Leverage lets an investor control property with less than its full purchase price in cash. It can magnify returns when income or value rises, but also magnifies losses and leaves required payments due.

What does the debt-service coverage ratio (DSCR) measure?

DSCR is net operating income divided by annual debt service: $\mathrm{DSCR}=\frac{\mathrm{NOI}}{\text{annual debt service}}$. Above $1.0$, NOI exceeds scheduled debt payments; below $1.0$, it does not cover them alone.

How is a property owner’s equity calculated?

Equity is the property’s value minus the debt secured by it: $\text{equity}=\text{property value}-\text{secured debt}$.

How does an adjustable-rate mortgage (ARM) change over time?

An ARM typically starts with a fixed introductory rate, then adjusts periodically based on its index, margin, schedule, and rate caps. Payments may rise or fall.

What happens to principal during an interest-only period?

During the specified interest-only period, scheduled payments cover interest but do not reduce principal. Payments may rise substantially when that period ends.