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

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 s

 

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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