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Master Real Estate Loan Jargon: 20 Essential Terms You Need to Ace

For real estate investors, gaining proficiency in loan terminology is paramount, particularly when engaging with non-traditional lenders such as private lenders specializing in hard money loans vs a conventional loan. The lending world is filled with specific jargon and concepts, making it a complex landscape to navigate. A deep understanding of these terms ensures smoother transactions, reduces the risk of miscommunication, and instills confidence in you as a real estate investor. Knowledge is power, and the more you know, the better you are positioned to make informed and strategic decisions in your investment financing journey. RBI Private Lending is committed to transparency in all of our loans, and we know that informed borrowers are more successful, which is one of our primary goals. This blog’ll review 20 of the most common loan terms to help you decode complex investment jargon!

Real Estate Loan Terms

1. Principal Investment – In the context of investing, the principal is the original sum committed by an investor for the purchase of an asset (in this case property) – independent of any earnings or interest.

2.  Interest Rate Cap Structure – An interest rate cap structure refers to the provisions that govern interest rate increases on variable-rate credit products such as variable rate mortgages and adjustable-rate mortgages (ARM). An interest rate cap is the limit on how high an interest rate can increase, and it can be structured to limit incremental increases in the rate as well. Interest rate caps can give real estate investors protection against significant rate increases and limits the maximum amount of interest rate costs.

3.  Loan Duration – Also known as loan term, the duration of a loan is the amount of time it takes for a loan to be completely paid off when the borrower makes regularly scheduled payments. A loan’s duration can either be short-term (6 months to 2-3 years) or long-term (20-30 years).

4. Private Money Loans (sometimes called hard money loans) – Private money or hard money loans, like those offered by RBI Private Lending, are primarily used in real estate transactions where the loan is secured by property. The funds generally come from individuals or companies and not banks. A private money loan is a way to raise money quickly but at a higher cost. And because private money loans are dependent on collateral instead of an investor’s financial circumstances, the funding time frame is shorter. While hard money lenders are fundamentally mortgage lenders, their programs are ideally suited to a variety of real estate investor needs.  

5.  Collateralization – Collateralization is when a valuable asset (such as property) is used as collateral to secure a loan. Should the borrower default on the loan, the lender may seize the asset and sell it to offset their loss.

6.  Loan to Value Ratio (LTV) – The Loan-to-Value Ratio (LTV) is a financial metric used in the mortgage and lending industry to assess the risk of a loan. It is calculated by dividing the amount of the loan by the appraised value or purchase price of the property (whichever is lower) and then multiplying by 100 to get a percentage. The larger the down payment applied, the lower the purchase price or higher the appraised value of the property the lower your LTV ratio will be, making your loan more attractive to a lender.

7.  Fix-and-Flip Loans – A fix-and-flip loan is a short-term mortgage loan used by real estate investors to purchase and improve a property and then sell it for a profit or refinance. These improvements range from minor renovations to a complete reconstruction of an existing home. At RBI, the initial draw is calculated based on the As-is Value of the property and the renovation budget is advanced in construction draws. Real estate investors find our fix and flip loan program to be a great tool to buy homes and increase their market value for resale.

 8. Bridge Loans – A bridge loan is a temporary, short-term loan that is provided to a borrower when the net proceeds from a sale of a prior residence are not available for the purchase of a new home. The intention is for the bridge loan to be paid off with the net proceeds from the prior residence’s sale. Essentially, it is a source of funding similar to a home equity loan, available until the investor secures permanent financing or removes an existing debt obligation, RBI’s bridge loans are typically taken out for a period of 12 to 24 months. 

9.  Construction Loans – Construction loans are used to finance the building of a real estate project. The builder or home buyer takes out a construction loan to cover the costs of the project before securing long-term financing. Construction loans usually have higher interest rates than traditional mortgage loans because they are considered relatively risky. They are short-term loans, usually for a period of only one year. The payments may come in installments as the project completes new stages of development. Once the construction project is complete, the borrower can either refinance the construction loan into a mortgage or take out a new loan to pay off the construction loan.  

10.  Property Valuation – A property valuation is the process of formally assessing a property’s value, and it is based on its condition, location, and many other factors. There are three types of value in real estate that are commonly used for assessing property:

  •  Assessed value: This value is usually used for tax purposes, and is determined by a municipal tax assessor, depending on the location. The higher the assessed value, the higher the property taxes.
  • Fair Market Value: This value is the price a property might sell for in an open market between a willing buyer and seller with acceptable knowledge of the property. 
  • Appraised value: This type of value is a professional appraiser’s formal evaluation of a property’s worth. An appraisal indicates what a buyer should expect to pay and what a lender should be willing to lend for a property.

 11.  After Repair Value (ARV) –  After Repair Value (ARV) is a term commonly used in real estate investing to represent the estimated value of a property after all needed repairs and renovations have been completed. It is a crucial metric for investors who specialize in purchasing properties in need of repair, such as those who engage in fixing and flipping houses. The key to success is to focus the renovation on factors that appeal to home buyers.

Calculation:

The ARV is generally determined through a comparative market analysis, which involves comparing the property to similar properties in the area that have been recently sold, adjusting for differences such as size, features, and condition. Here’s a basic formula to illustrate the concept:

ARV = Property Purchase Price + Value of Renovations

Example:

If an investor buys a property for $100,000 and spends $30,000 on renovations, the ARV of the property would be $130,000, assuming that the market values the renovations at cost. Ideally, of course, the home value will increase by more than the cost of the renovations resulting in a property value that produces a profit on its 

12.  Amortized Loan – A loan that is to be repaid via a series of regular installments of principal and interest, which are equal or near equal, without a balloon payment prior to maturity.

13.  Cross-Collateralization – Cross collateralization is when an asset (such as an investment property) that is already collateral for one loan is used as collateral for a second loan. The two loans can be the same type, such as a second mortgage. This tool allows people to leverage their existing assets to get a better interest rate and have a simpler loan process.

14.  Interest Reserves – An interest reserve is a capital account that a lender establishes to fund a loan’s interest payments during a construction term. It is essentially a checking account whereby a predetermined amount of money is deposited as part of the first construction draw. The lender, in turn, debits the checking account for the interest payment each month.

15.  Points (Origination Points) – Points are a type of prepaid interest that borrowers can pay up front in exchange for a lower interest rate and monthly payments (also known as “buying down” an interest rate) 

16.  Balloon Payment – A balloon payment is a large, one-time payment at the end of the loan term that pays off the remaining balance. It is often more than two times the loan’s regular monthly payment and can be tens of thousands of dollars. Some loans may allow for the balloon payment to be converted into a more traditional loan, but this should be verified with the lender before investing in the real estate.

17.   Anticipated Hold Period – The “Investor’s Hold Period” refers to the length of time a real estate investment is held by an investor. It starts when a property is purchased and ends when that asset is sold and the outstanding mortgage balance is paid. The hold period can vary significantly depending on the investor’s strategy and the type of investment. For example, a fix and flip investor will have a short hold period, and a rental property may have a longer anticipated hold period.

18.  Cash-out Refinancing – This is a form of mortgage refinance whereby a new mortgage is taken out for more than the previous mortgage balance, and the property owner receives the difference in cash. Unlike a second mortgage, a cash-out refinance doesn’t create another monthly payment – the old mortgage is paid off and replaced with a new mortgage loan.  

19.  Rental Yield – Rental yield is money someone makes on an investment property by measuring the gap between the overall costs and the income received from renting out the property. This calculation gives an investor a better idea of the ongoing return that will be earned on the rental property investment. It can also be helpful when determining the amount of rent that should be charged.

20.  Capitalization Rate (Cap Rate): The cap rate is the Net Operating Income (gross profit of a rental property) divided by the purchase price. It is an indicator of the risk and return of a property. It tells you the return of an investment before financing costs. 

Conclusion and Next Steps

It’s important to master your loan terminology when it comes to dealing with private and hard money lenders or any other lenders. Remember, at RBI, we are here to help you understand all the ins and outs of the non-traditional mortgage lending world, and we are committed to complete transparency throughout the loan process.

RBI Private Lending offers loan types to meet the needs of real estate investors. Unlike most lenders in the conventional loan space, our focus is on real estate investors and their needs.

With RBI by your side, you can feel at ease making financial decisions, knowing you have a financing partner who will guide and support you all along the way. We aim to make the investment mortgage process as straightforward as possible and help you make more money!

For more information, click here.

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