Interest Only Balloon Promissory Notes

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					Chapter 10
1. Describe the types of promissory notes, then
   explain adjustable rate loans.
2. Explain a deed of trust (trust deed), a mortgage,
   installment sales contract, and foreclosure
   procedures.
3. Define clauses common to financing documents:
   acceleration, alienation, subordination,
   prepayment penalty.
4. Outline the principles of loan regulations: Truth-
   In-Lending, RESPA, Fair Credit, Real Fair
   Credit Reporting and Property Loan Law.
            Financing Instruments


      Note                     Security
Promise to RePay             Collateral Lien
   Hypothecate
     Straight Note                  Mortgage

    Amortized Note               Deed of Trust

                                 Land Contract
       Partially Amortized

        Fully Amortized

    Installment Note
      Promissory Notes (SAIF)
           Legal evidence for the debt
S traight Note – term note
  Payments of Interest Only
  Entire prin. and interest repaid on the final due date

A mortized Note
  Monthly payments which include both Principal and Interest

   • F ully amortized or installment type--Liquidates the debt with final
     payment
   • Partially amortized or balloon payment type (requires larger final
     payment)

I nstallment Note-Periodic pymts of principal & int
    Amortization Table
  12 ½ % 30 Years Loan -             Term Amt
                                       $100
                                                20 Years
                                                  1.14
                                                           25 Years
                                                             1.10
                                                                      30 Years
                                                                        1.07
                                                                                 40 Years
                                                                                   1.05

        $155,700                       200
                                       300
                                                  2.28
                                                  3.41
                                                             2.19
                                                             3.28
                                                                        2.14
                                                                        3.21
                                                                                   2.10
                                                                                   3.15

1. Look down the 30 year column        400
                                       500
                                                  4.55
                                                  5.69
                                                             4.37
                                                             5.46
                                                                        4.27
                                                                       53.34
                                                                                   4.20
                                                                                   5.25
   for the monthly payment on          600        6.82       6.55       6.41       6.30

   $100,000                            700
                                       800
                                                  7.96
                                                  9.09
                                                             7.64
                                                             8.73
                                                                        7.48
                                                                        8.54
                                                                                   7.35
                                                                                   8.40
2. Next, determine the monthly         900       10.23       9.82       9.61       9.45

   payment for $50,000, $5,000 and     1000
                                       2000
                                                 11.37
                                                 22.73
                                                            10.91
                                                            21.81
                                                                       10.68
                                                                       21.35
                                                                                  10.49
                                                                                  20.98
   $700 using the same method          3000      34.09      35.72      32.02      31.47

3. Then add the amounts together.      4000
                                       5000
                                                 45.45
                                                 56.81
                                                            43.62
                                                            54.52
                                                                       42.70
                                                                       53.37
                                                                                  41.96
                                                                                  52.45
                                       6000      68.17      65.43      64.04      62.94
  Amount               Payment         7000      79.53      76.33      74.71      73.43

  $100,000             $1,067.26       8000      90.90      87.23      85.39      83.92
                                       9000     102.26      98.14      96.06      94.41
    50,000                533.63      10,000    113.62     109.04      106.73    104.90

     5,000                 53.37      20000     227.23     218.08      213.46    209.79
                                      30000     340.85     327.11      320.18    314.68
       700                  7.48      40000     454.46     436.15      426.91    419.57

  $155,700             $1,661.74      50,000    568.08     545.18      533.63    524.46
                                     100,000    1136.15    1090.36    1067.26    1048.92
             Prepayment Penalty =
 6 month’s interest on the unpaid balance after lst
                 deducting 20%
Unpaid loan Amount
X 80%
   (cannot charge on the top 20% of
     the loan)
X Interest rate
  To get interest for 12 months
            = 1 year
/ 2
   To get one-half year
              Real Estate Loans
Fixed Rate - The interest rate does not change
Adjustable Rate Mortgage (ARM)-rate
  Lower initial rate than fixed-rate mortgage
  Rate cap and payment cap
  Based on an index (11th District etc.) and margin
Variable Interest Rate (VIR)
Graduated Payment Mortgage (GPM)-increasing
Graduated Payment Adjustable Mortgage
(GPAM)
Growing Equity Mortgage (GEM)-
    principal
All-Inclusive Trust Deed (AITD)
Reverse Annuity Mortgage (RAM)
VARIABLE PAYMENT PLANS
16
14
12
10                                      Loan Interest
                                        Rate
 8
                                        Treasury
 6                                      Securities Rate
 4
 2
 0
     Year Year Year Year Year Year
      1    2    3    4    5    6

The interest rate may change and as a result the
following may be affected:
 1.Payments
 2.Principal owed
 3.Term (length of the loan)
               DEED OF TRUST
                          (Trust Deed)

 Easier, cheaper, faster foreclosure
 Creates a lien to secure repayment of a note
 Trustor – Borrower
 Trustee – Stakeholder or Titleholder
 Beneficiary – BANK - Lender
              Deeds to                Who holds title
   Trustor                 Trustee    until debt is paid
  When debt               Reconveys
  is paid       Trustor               Trustee

The Trustee returns title to the Trustor by a Deed of Reconveyance
                                MORTGAGE
O O -OO
Mortgagor - Borrower                 (A Contract)

    ee
Mortgagee e e
          Lender
 Loan Payoff
     Satisfaction of Mortgage
  Foreclosure by default
     Law suit / Court order
     Decree of Foreclosure
     Notice of Sale
     Sheriff’s Sale
     Sheriff’s Deed
     Deficiency Judgment possible
     One-year Period of Redemption
        Common Provisions in
        Security Instruments
                Acceleration
                  Clause

  Alienation
(Due-On-Sale)                  Assumption
                    or
   Clause                       Provision


   Lock-In                     Prepayment
                    or
   Clause                       Provision
       SECURITY INSTRUMENTS
               Mortgage                           Deed of Trust               Land Contract
Borrower       Mortgagor                          Trustor                     Vendee
Lender         Mortgagee                          Beneficiary                 Vendor
3rd Party                                         Trustee
Instruments    Mortgage Contract –                Trust Deed– Conveyance      AITD – Land Contract
               Hypothecation of real property     of title to trustee as
               as security for debt               security for the debt

               Mortgage Note: Evidence of         Trust Note – Evidence of    Promissory Note
               debt                               debt
Title during   Rests in – Mortgagee               Rests in – Trustee          Rests in – State of
loan term                                                                     California
                                                                              Vet holds a lease
 Protection    Abstract of Title or Certificate   Policy of Title Insurance   Policy of Title
                                                                              Insurance
Conveyance Warrantee Deed                         Grant Deed                  Land Contract
                                                                              & Lease
Loan Payoff    Satisfaction of mortgage           Reconveyance Deed           Grant Deed
              TRUST DEED vs. MORTGAGE
             Deed of Trust                  Comparison                  Mortgage


If Foreclosure by Court Action: Same as      Lender’s     Possible Deficiency Judgment
for Mortgage                                  Rights
Trustee’s Sale - No Deficiency Judgment
Possible
If Foreclosure by Court Action: Same as      Owner’s      Before Decree of Foreclosure
for Mortgage                                 Rights of    Owner may redeem anytime by bringing
Trustee’s Sale                              Redemption    payments current
Notice of Default – Owner may redeem                      After Decree of Foreclosure and Sale
by bringing payments current within                       Owner has one year “Equity of
three months                                              Redemption”
Notice of Sale – Owner may redeem only                    Must pay indebtedness in full to redeem
by paying entire indebtedness in full
Trustee’s Sale Sale final. No redemption
Trust Note – Outlaws four years after due    Stature of   Mortgage note and contract both outlaw
date                                        Limitations   four years from due date, or from date
Trust Deed – Never outlaws – Lender                       of last payment. No relief. Monies
can always have trustee sell to recover                   involved not collectable.
unpaid balance
        Mortgage versus Trust Deed
              Mortgage                                  Deed of Trust
Foreclosure   Court action Only                         Court Action or Trustee’s Deed
              Equitable Redemption                      Reinstatement Period
              Notice of Default                         Notice of Default/3 months
              Lawsuit/Court                             Notice of Sale
              Notice of Sale                            21 day minimum publish
              Statutory Redemption                      Trustee’s Sale
              Sheriff’s Sale                            All sales final
              Deficiency Judgment                       Trustee’s Deed
              Sheriff’s Deed                            No redemption
              1 year to redeem
Owner’s       Before Decree of Foreclosure              If Foreclosure by Court Action:
Rights of     Owner may redeem anytime by bringing      Same as for Mortgage
Redemption    payments current                          Trustee’s Sale
              After Decree of Foreclosure and Sale      Notice of Default – Owner may
              Owner has one year “Equity of             redeem by bringing payments
              Redemption”                               current within three months
              Must pay indebtedness in full to redeem   Notice of Sale – Owner may
                                                        redeem only by paying entire
                                                        indebtedness in full Trustee’s Sale
                                                        Sale final. No redemption
Buyer Takes Over Seller’s Loan
 Buyer assumes existing loan

 Substitution of Liability

 Buyer takes title “Subject to” existing loan.
 The Basic Rule of Finance
If you don’t pay … they will take it away !
    STEPS IN A TRUSTEE’S
            SALE
1. Beneficiary requests trustee to foreclose
2. Trustee records Notice of Default
3. Three-month waiting period
   (Borrower has reinstatement period)
4. Advertise “Notice of Sale” with date, time and
   place of sale
   a) Borrower has limited right to reinstate
      1.   (lst 16 days)(last 5 days must pay entire loan)
   b) Publish once a week; minimum 3-week period (21 days)
5. Sale to highest bidder for cash (loan amount+costs)
6. Trustee’s deed is issued (all sales final; borrower
   has no right of redemption)
7. Disbursement of funds
                   Junior Lien
Junior Lien – Purpose: Close the gap between the
            sales price and the first loan plus down payment
 Types: “Hard” money second – cash from lender
        “Soft” money second – credit from seller
 Default: Junior lienholder may foreclose

     REQUEST FOR COPY OF
   NOTICE OF DEFAULT
           AND SALE
Purpose: To inform holders of junior
liens when the holder of a senior lien
(deed of trust) is about to foreclose
          SALES CONTRACT
       Land Contract or Installment Sales Contract
                     Vendor - Vendee
1.   Low down payment usually required
2.   Allows marginal buyer to acquire real estate
3.   Buyer gets immediate possession
4.   Buyer receives full legal title after loan paid off
5.   Seller must follow statutory notice requirements if
     buyer defaults
6.   All parties should consult their attorney
7.   Vendee may receive flawed title.
8.   Vendor may have problems during the term.
          Sales Contract (cont.)

a) Buyer usually receives equitable, insurable,
   recorded title
b) The contract cannot prohibit recording
c) Creates a cloud on vendor’s title
d) Removed by court or vendee signing a
   quitclaim deed
e) Vendee may assign all rights if no release
   from vendor
  TRUTH IN LENDING LAW
       Regulation Z
           TIL
Purpose – disclosure of credit
A.P.R. – cost of credit in
percentage terms
Right of rescission
Annual Percentage Rate (APR)
must be stated when
advertising financing
RESPA
 Federally related loans
 1-4 unit residences
 Special Information Booklet
 Good faith settlement of costs
 Sent 3 days from loan application
 Must be presented no later than the day
 before the close of escrow/settlement date.
   CREATIVE FINANCING
    DISCLOSURE LAW
Creative Financing Disclosure Law (AB 3531)
Consumer protection in writing:
Balloon payment
Senior loan priority/status
Negative amortization
Credit report data
Notice of default request
All-Inclusive Trust Deed (AITD)
MORTGAGE LOAN BROKERAGE LAW
                     Article 7
For loans not “under the umbrella”
     the sky’s the limit- hard money (cash)
Borrower obligated. Broker must keep copy for 5 years.
                  Loans Covered
         (Broker’s Commission Is Limited)

1st Trust Deed              Junior less than $20,000
Less than $30,000           2 years 5%
5% less than 3 yrs          2 but less than 3 years 10%
3 + years 10%               3 + years 15%
           Sample Question:
         Commission Loan Fee
What is maximum amount a broker may charge
for loan fees for a $30,000 2nd due in 4 yrs with
            an interest rate of 12%?

A) $ 1,500
B) $ 3,000
C) $ 4,500
D) None of the above
    Mortgage Broker Limits

COSTS:
 Limits amount of costs and expenses
 Cannot be over 5% of the loan amount
  • Actual costs, or
  • $390
 Cannot exceed $700 for costs and expenses.
               Sample Question:
              Maximum Loan Costs
Loan expenses on a $30,000 loan:
   Appraisal         $300
   Recording         $ 15
   Credit Report     $ 25


What is the maximum loan charges the borrower may pay?
        A.   $1500
        B.   $ 700
        C.   $ 390
        D.   $340
             $ 340
              Usury Law
Maximum rate
  10% or
  Federal Discount Rate + 5%

Private lenders & borrowers-usury law

Exempt: banks, S & Ls, insurance co.

Exempt: Loans negotiated by a licensed real
estate broker
I think I can See a better place
   (my pillow), so I’M GOING
            HOME.

				
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