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Real Estate Finance

This chapter covers how buyers pay for real estate, focusing on mortgages, loan types, key clauses, and the math of interest, points, and ratios. You will also see how the primary and secondary mortgage markets work and how federal disclosure laws protect borrowers. Practice the calculations, since finance questions often involve numbers.

Mortgage Basics and Parties

A mortgage is a security instrument that pledges real property as collateral for a loan. Knowing the parties and their roles prevents confusion on the exam and in practice.

The mortgagor is the borrower
The borrower pledges the property as security for the loan.
The mortgagee is the lender
The lender holds the security interest until the debt is repaid.
The note is the promise to repay
The promissory note states the debt terms, while the mortgage secures it.
Hypothecation pledges property without giving up possession
The borrower keeps using the property while it secures the loan.

Loan Types and Clauses

Loans come in several forms, and mortgage documents contain clauses that define the parties' rights. Understanding these helps borrowers choose wisely and understand risks.

Fixed-rate loans keep a constant rate
Payments of principal and interest stay level for a fully amortized loan.
Adjustable-rate loans change with an index
The interest rate and payment can rise or fall over time.
Acceleration clause demands full balance on default
It lets the lender call the entire debt due before foreclosure.
Prepayment penalty charges for early payoff
Some loans impose a fee for paying ahead of schedule; not all do.
Conventional loans lack government backing
They are not FHA-insured or VA-guaranteed and rely on borrower credit.

Loan Math and Ratios

Finance questions frequently require simple calculations. Learn to compute interest, loan-to-value, points, and capitalization rates. Interest on an amortized loan is charged on the outstanding balance.

Simple interest equals principal times rate times time
For example, $300,000 at 6% for one year is $18,000, or $1,500 per month.
Loan-to-value is loan divided by value
A $200,000 loan on a $250,000 property is an 80% LTV.
One discount point equals 1% of the loan
Two points on a $200,000 loan cost $4,000, paid at closing to lower the rate.
Cap rate is net operating income divided by value
$24,000 of NOI on a $300,000 property is an 8% cap rate.

Mortgage Markets

The lending system has two connected markets. The primary market makes loans to borrowers, and the secondary market buys those loans to keep money flowing to lenders.

The primary market originates loans
Banks and mortgage companies lend directly to homebuyers.
The secondary market buys existing loans
Purchasing loans replenishes lenders' funds so they can lend again.
Fannie Mae and Freddie Mac add liquidity
They are major buyers of loans in the secondary market.
Liquidity keeps credit available
Selling loans lets lenders continue serving new borrowers.

Borrower Protections and Escrow

Federal laws require lenders to disclose loan costs so borrowers can compare offers. Lenders also often manage escrow accounts to ensure taxes and insurance stay current.

Regulation Z requires APR disclosure
The Truth in Lending Act mandates disclosure of the APR and finance charges.
APR reflects the true cost of credit
It includes certain fees beyond the note rate for easier comparison.
Escrow accounts pay taxes and insurance
Lenders collect a portion each month and pay the bills when due.
Escrow analysis adjusts payments
The account is reviewed periodically and payments are adjusted as needed.
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Last updated: July 2026

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