Types of Mortgages You Should Know for the Real Estate License Exam
Although a specific mortgage loan may not be available for every possible situation, the variations will be on the Real Estate License Exam. There are enough variations to cover most people’s real estate needs.
A blanket mortgage is a loan that covers more than one piece of property. It sometimes is used to finance a subdivision development. Say, for example, that a builder buys six lots on which he plans to build houses and sell them.
The builder may want to use a blanket mortgage to finance the purchase, because it usually comes with a partial release provision. A partial release is a provision that allows the lien to be removed separately from each parcel as it is sold to a buyer and the bank is paid a portion of the loan amount.
A construction loan is made to finance a construction project. A typical case is when someone who owns property hires a builder to build a house. Money from the loan is released to the builder at certain points as the project progresses. At the end of the project, the loan generally is converted to a conventional mortgage.
Home equity loan
A home equity loan seeks to use the equity that a mortgagor has built up in a property either for improving the property or some other use. Home equity is the difference between the value of the property and the debt attributed to the property. Say someone paid $100,000 for a house. Later, the house was appraised at $200,000, and the mortgagor has $50,000 left to pay on the mortgage.
$200,000 – $50,000 = $150,000 equity
An open mortgage is a mortgage loan that can be paid back at any time without a prepayment penalty.
A prepayment penalty is a fee that is charged by a lender whenever a mortgage is paid off earlier than its normal schedule. You need to determine what, if any, laws your state has adopted regarding prepayment penalties in conventional mortgages.
An open-end mortgage is a loan that can be reopened and borrowed against after some of it has been paid down. For example, you can borrow $150,000 via a mortgage loan with an agreement in place that after you pay some of it down, you can borrow back up to the $150,000 limit again.
A package mortgage is a loan that covers real estate and personal property being sold with the real estate. The buyer of a house in which furniture is being included in the sale may want to apply for a package loan. For example, this loan can be used to purchase a furnished vacation home.
Purchase money mortgage
The purchase money mortgage is the mortgage loan used to buy real estate. The term sometimes is used to mean the mortgage that a seller takes back as part of the sale price of a property.
When a seller sells his property for $200,000, and the buyer has $50,000 cash, is approved for a $100,000 mortgage loan, but still falls $50,000 short, the seller can agree to take back a mortgage worth $50,000 to make the deal happen.
State government sets rates for interest that cannot be exceeded — called the usury rate. These seller second mortgages may not be subject to the usury limits that are set by state law, so you need to verify that information in your state. Mortgages made by lenders (not sellers) are subject to these limits.
Reverse mortgages sometimes are called reverse annuity loans. These loans enable a property owner to use the equity in the property without selling the property. No payment is due on the loan while the owner still lives in the house.
These loans often are used for income by senior citizens on fixed incomes with large amounts of equity in their homes. They’re usually paid off by the sale of the property after the homeowner dies or moves out.
A sale leaseback isn’t a mortgage, but can be a source of project financing and a means of obtaining the equity in a property. Usually used in commercial property situations, an owner-occupant uses a sale leaseback to sell the building but agrees to remain in the building under a lease. The new owner has a tenant and the old owner has gotten his money out of the building to use.
Shared equity mortgage
The shared equity mortgage allows for a share of the profit on the property to be given to someone else in return for help purchasing the property. A relative, investor, or lending institution may agree to provide funds for a down payment or help with the mortgage payment. When the property is sold, a predetermined share of the profit is given to the person who provided the financial help.
A temporary loan, also called interim financing, bridge loan, swing loan, or gap loan, is used when funds are needed for short periods of time to complete a real estate transaction. A typical situation where a temporary loan may be used is when a seller is selling one house and plans to use the proceeds from the sale to buy another house.
A wraparound mortgage is a new mortgage that literally wraps around an old mortgage. A seller sells a property to a buyer, but the seller doesn’t pay off an existing mortgage. The buyer gives a new, larger mortgage to the seller.
This new mortgage includes the amount due on the original mortgage. The buyer makes payments on the new mortgage to the seller. The seller, in turn, makes payments on the old mortgage to the lender. This mortgage is used when the old mortgage won’t be paid off at the time of the sale of the property.