Terms Every Beginner Real Estate Investor Should Know Part 2

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This is part two of my four-part series covering Real Estate Terms and Acronyms. If you haven’t read Part 1 yet, please do so here! You don’t want to skip part 1 as you will miss out on the basic real estate terms. To summarize, I decided to publish a list of real estate terms and metrics explaining how to calculate them. However, the list turned out to be too long to cover in a single article, so I decided to split it in to four shorter, easier to read parts.

In this part, we will cover basic financing terms. I have no doubt that you will be using mortgages to finance your real estate investments. Therefore, you should have at least a basic understanding of the most common terms you will come across when discussing financing with banks and other lenders.

So, without any further delay, let’s dive in to part two…

Real Estate Financing Terms

  • APR: This acronym is the annual percentage rate of interest. It is a cost of borrowing money expressed as an annual rate. Consumer protection laws require lenders (such as banks) to disclose the “cost” of borrowing in a standardized way to make it easier to compare lenders and loan options. The interest rate on mortgage may be fixed or a floating, adjustable interest rate
  • Balloon Loan: Balloon loans are loans that are not fully amortized. This means that a large lump sum payment will be required at the final payment. Balloon payment mortgages are more common in commercial real estate than in residential real estate. In many cases, borrowers will refinance a balloon mortgage into another loan or sell the property before the final payment is due.
  • Loan Amortization: This refers to the calculation of the monthly payment (see PITI below). A longer amortization will lower the payments. Conversely, a shorter amortization will increase the monthly payment amount. Do not confuse this with a loan balloon. A loan may have a 30-year amortization but it may balloon in 5 years.Financing Terms, , Passive Income IT
  • Amortization Schedule: This is a table listing each payment. It provides a breakdown for each payment showing how much goes towards interest while the remaining amount is applied towards reducing the outstanding principal.
  • LTV: This acronym stands for Loan-to-Value and is expressed as a percentage. Almost all lenders will have a maximum LTV that they are willing to lend to. Lenders will say that their maximum LTV is 0.75 or 75%. To find out the highest loan amount, you will take the property’s value and multiple by this percentage. For example, if the value of the property is $100,000, the maximum you could borrow against it will be $75,000.
  • PITI: This stands for Principal (P), Interest (I), property taxes (T) and insurance (I). Loan payments usually contain two components, interest and principal. However, many lenders will require that you pay them the property taxes and insurance in monthly installments. To make it easy, they add this to the monthly payment. The lender will hold this money in an escrow account and pay your property taxes and insurance each year when it comes due.

As mentioned in part 1, I hope that you will use these terms to help you make better decisions and mitigate some of the inherent risks that come with investing in real estate.  These are just the basic financing terms you should be familiar with to get started in real estate investing. As you progress in your passive income journey, you will come across many creative financing options which will contain additional terms. You can find additional financing terms on Wikipedia.

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