Purchase-Money Mortgages
This is a note and mortgage created at the time of purchase when the seller agrees to finance all or part of the purchase price and consists of a first or junior lien depending on whether prior mortgage liens exist. This is based on the fact that the seller gives the buyer title to the property. Often referred to as seller financing or owner financing, a PMM is often used when the buyer does not qualify for a typical lender loan. The buyer/borrower executes a note and mortgage at the time of purchase; the seller records the mortgage against the property. Payments are made to the seller, according to the terms of the note. If the buyer stops making payments, the seller has recourse to foreclose on the property.
Package Loans
A package loan includes real and personal property. In recent years, these kinds of loans have been very popular with developers and purchasers of furnished condominiums. Package loans usually inÂclude furniture, drapes, the kitchen range, refrigerator, dishwasher, washer, dryer, food freezer, and other appliances as part of the sales price of the home.
Blanket Loans
A blanket loan covers more than one parcel or lot. It is usually used to finance subdivision developments. However, it can be used to finance the purchase of improved properties or to consolidate loans as well. A blanket loan usually includes a provision known as a partial release clause. This clause permits the borrower to obtain the release of any one lot or parcel from the lien by repaying a certain amount of the loan. The lender issues a partial release for each parcel released from the mortgage lien. The release form includes a provision that the lien will continue to cover all other unreleased lots.
Wraparound Loans
A wraparound loan enables a borrower with an existing mortgage or deed of trust loan to obtain additional financing from a second lender without paying off the first loan. The second lender gives the borrower a new, increased loan at a higher interest rate and assumes payment of the existing loan. The total amount of the new loan includes the existing loan as well as the additional loan taken out by the borrower. The borrower makes payments to the new lender based on the total amount, and the new lender in turn makes payments on the original loan out of the borrowers’ payments.
A wraparound mortgage can be used to refinance real property or to finance the purchase of real property when an existing mortgage cannot be prepaid. The buyer executes a wraparound mortgage to the seller or lender, who collects payments based on the terms of the new loan and continues to make payments on the old loan.
Open-End Loans
An open-end loan secures a note executed by the borrower to the lender. It also secures any future advances of funds made by the lender to the borrower. The interest rate on the initial amount borrowed is fixed, but interest on future advances may be charged at the market rate in effect. It allows the borrower to “open” the mortgage or deed of trust to increase the debt to its original amount, or the amount stated in the note, after the debt has been reduced by payments over a period of time. The mortgage usually states a maximum amount that can be secured, the terms and conditions under which the loan can be opened, and the provisions for repayment.
Construction Loans (Interim Financing)
Construction loans are generally short-term or interim financing. The borrower pays interest only on the monies that have actually been disbursed. The borrower is expected to arrange for a permanent loan, also known as an end loan or take-out loan, which will repay or take out the construction financing lender when the work is completed.
Sale-Leaseback
Sale-leaseback arrangements are used to finance large commercial or industrial properties. The land and building, usually used by the seller for business purposes, are sold to an investor. The real estate is then leased back by the investor to the seller, who continues to conduct business on the property as a tenant. The buyer becomes the landlord (lessor), and the original owner becomes the tenant (lessee). This enables a business to free money tied up in real estate to use as working capital or to take advantage of accounting practices in the treatment of leases versus assets (balance sheet reports).
Buy-downs
A buy-down is a way to temporarily (or permanently) lower the initial interest rate on a mortgage or deed of trust loan. Typical buy-down arrangements reduce the interest rate by 1 to 2 percent over the first one to two years of the loan term. After that, the rate rises. The assumption is that the borrower’s income will also increase, making it more likely that the borrower will be able to pay the increased monthly payments. In a permanent buy-down, a larger up-front payment reduces the effective interest rate for the life of the loan.
Home Equity Loans
Home equity loans are a source of funds using the equity built up in a home. The original mortgage loan remains in place; the home equity loan is junior to the original lien. It is an alternative to refinancing and can be used for a variety of financial needs, such as to:
The original mortgage loan remains in place, and the home equity loan is junior to the original lien. If the homeowner refinances, the original mortgage loan is paid off and replaced by a new loan.
A home equity loan can be taken out as a fixed loan amount or as an equity line of credit. With the home equity line of credit, referred to as a HELOC, lenders extend a line of credit that borrowers can use at will. The homeowner must consider a number of factors before deciding to secure a home equity loan, including:
