RE Financing Ch. 1

  1. Financing
    lending and borrowing
  2. What are the factors that affect whether someone can afford to buy a house?
    • -housing price
    • -Income
    • -Tax considerations
    • -availability of financing (most important)
  3. Typical mortgage financing
    • -loan cover much of price
    • -downpayment is from buyer's own resources
    • -purchased property serves as collateral
  4. Principal
    -amount of loan; amount borrowed
  5. Interest
    cost of borrowing money
  6. If the lien isn't repaid as agreed, the lien created by the mortgage or deed of trust gives the lender the right to __________.
  7. Return
    -the interest (profit) made by lender
  8. The availability of affordable mortgage financing fluctuates with general ___________ conditions.
  9. The national economy--the system of businesses, industries, and trade that provides us with jobs, income, place to live, and goods and services--is driven in part by _______ _______, which is simply money that's used to fund business enterprises and other ventures, projects, and transactions.
    Investment capital
  10. How is investment capital funded?
    -by lenders/investors
  11. What is the difference between return of investment and return on investment?
    • -return of investment is the recapture of amount originally lent or invested
    • -return on investment is the interest collected (investor's profit).
  12. An investor's return may take various forms, including interest, appreciation, rents, or dividends.
  13. What are two general categories of investments?
    • -ownership investments: investor purchases an asset of a property interest in an asset; real estate purchases, stock purchases
    • -debt investments: investor provides money to an entity that will eventually repay it.
  14. A return on an ownership investment may be received by net income and/or appreciation. What is the difference between them?
    • -net income is income monies produced during the investor's period of ownership.
    • -appreciation is increase in value (appreciate) over time, maybe by inflation or an increase in demand.  The return on appreciation is not realized until the asset is sold.
  15. inflation
    -increase in price due to economic forces
  16. How is corporate stock a form of ownership investment?
    -buy shares of the company which if successful can give returns in dividends (a share of the profits) and/or the share is appreciate.
  17. How do debt investments make money?
    -through interest of loans, bonds and savings accounts
  18. What are bonds?
    • -a certificate of indebtedness issued by a governmental body or business entity. 
    • -generates a return for the bondholder in the form of periodic payments of interest until the principal is repaid in a lump sum.
  19. What is a coupon rate and face amount?
    • -coupon rate is the amount of interest that is paid on the bond.
    • -face amount is the bondholder original lump sum that is paid back on the maturity date.
    • -so you make money by the coupon rate (period interest payments) until the issuer pays you face amount.
  20. What is a certificate of deposit (CD)?
    • A savings arrangement in which a depositor agrees to leave money on deposit for the use of the financial institution for a specified period, or pay a penalty for earlier withdrawal.
    • -CDs with longer periods have higher interest rates
  21. How can you make profit off of a savings account?
    -is not much you will make back. Put money in the bank, bank uses to give loans, you earn a small interest fee, whereas the bank will keep more of the interest b/c that is how they make money.
  22. Securities may be either ownership investments or debt investments; stocks and bonds are the most prominent examples.
  23. Securities
    • -are investment instruments that: give the holder an interest or right to payment, do not give the holder direct managerial control
    • -are liquid assets that can be sold easily in established financial markets
  24. What is a key characteristic of securities?
    -they can be bought or sold easily in financial markets established for that purpose; stocks be traded for stocks, bonds be traded for bonds; sold in that category for liquid asset (cash)
  25. Mutual Funds
    -say you want to invest in stocks and bonds, but don't have the time to research the market or have little experience in investing.  You hire an investor who is a professional in the market.  They take your money and invest it in securities to make you money.
  26. Securities and Exchange Commission (SEC)
    regulates securities trading to protect investors; financial disclosures requires, no insider trading (hiding info from public)
  27. In what two ways does security trading affect mortgages?
    • -has an impact on mortgage interest rates and the availability of funds for home loans
    • -mortgages can be pooled together and "securitized" for sale to investors.
    • ***Investment opportunities compete for available investment funds
  28. What are the three potential advantages investors look for in an investment opportunity?
    • -safety; low risk of losing amount originally invested; count on a return of the investment.
    • -Liquidity; investment can quickly be converted into cash.
    • -Yield; investor's rate of return; investments that are both safe and liquid typically off the lowest yields. * for higher yields an investor take a more riskier investment; "higher yields for long-term investments; **yields are not necessarily fixed; change with market; rise or fall in interest rates
  29. What is an example of an illiquid investment?
    -real estate; although it can be sold for cash, it is not quick cash
  30. An investor with a _________ _________ is less likely to face a serious net loss.
    -diversified portfolio
  31. What risks can lender's face in mortgage lending?
    • -Risk of Default; borrower fails to make the payments as scheduled; loan application screening; higher risk, higher interest rate lenders will charge.
    • -Risk of Loss; lenders take steps to limit the risk of loss in the event that a borrower eventually does default; appraising property (see the worth), mortgage insurance on loan (when necessary), borrowers get property insurance.
    • -Interest Rate Risk; after the lender has loaned money to a borrower at a certain interest rate, market interest rates will rise (fixed interest rate over a period of time). Interest rate risk increases with the length of the loan term.  Lenders will try to get around this risk by lending at adjustable-rate mortgages and selling loans on the secondary market.
    • -Prepayment Risk; paying back all or part of the principal before it is due; market interest rates fall, easier for borrowers to pay back loan; less return for lender; borrowers can refinance when interest rates are low; some loan agreements allow the lender to charge the borrower a penalty if the loan is prepaid.
  32. Market Interest Rate
    -typical rate charged for a certain type of loan in the current market.
  33. High mortgage rates cause a ________, whereas low rates ______ the market.
    • -slowdown
    • -spur
  34. If supply exceeds demand, prices (rates) go _______; if demand exceeds supply, prices (rates) go _______.
    • -down
    • -up
  35. Stocks and bonds are the primary examples of 
    a. ownership investments
    b. securities
    c. collateral
    d. all of the above
    b; stocks and bonds are examples of securities, stocks are ownership investments, but bonds are debt investments
  36. A company that invests in a diversified portfolio of stocks and bonds on behalf of its investors/owners is called a
    mutual fund
  37. Stevenson borrowed money from Acme Savings to buy a rental house.  He paid 15% down.  Which of the following is true?

  38. When market interest rates are rising, a lender making a 30-year loan at a fixed interest rate will probably be most concerned about...
    interest rate risk
Card Set
RE Financing Ch. 1
Finance and Investment