Mortgage Note Investing Terms
Welcome to the first in a series of articles covering mortgage note investing terminology.
Here you’ll learn all the key terms you’ll hear during your note investing journey.
There’s a heck of a lot of terminology to deal with, so let’s start right at the start with 28 mortgage note investing terms starting with A.
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- Abandonment: This is where an owner voluntarily gives up their rights of ownership (interest) by abandoning – or failing to use – a property.
- Absentee Landlord/Owner: This is when a landlord doesn’t actively manage a property. This often results in property damage, deferred maintenance, tax liens, city code violations and other problems.
- Abstract of Title: This is a summary of the all the public records that relate to the title of a property. An attorney or title insurance company will refer to an abstract to identify any title defects that must be cured before title can be conveyed during a sale of the property.
- Accounting: Simple, but vitally important. Accounting involves the keeping of proper financial records for your note investing business. This includes information relating to the amortization, balance, and payment history of all the notes you own.
- Acceleration Clause: This clause gives a lender the right to demand full repayment of a loan in certain predefined circumstances such as the borrower defaulting on payments, damage to the property, or transferring ownership of the property without permission.
- Accessory Building: A separate structure to the main building such as a garage or shed.
- Accounts Payable: This is a common business term that simply means money that you are owed, usually for services or goods purchased.
- Accredited Investor: A definition of an investor that meets certain criteria set out by the Securities and Exchange Commission. While subject to change, currently this means an individual with a net worth that exceeds $1 million or an income exceeding $200,000 in each of the two most recent years with the reasonable expectation of the same income level in the current year (including spouse: $300,000). An Accredited Investor is deemed competent and capable to make more complex investing decisions about investments that are not suitable for less sophisticated investors such as private equity.
- Accrued Interest: This is the amount of interest that is due but has not yet been paid. This can include interest, which is currently due but scheduled to be paid in arrears, so it doesn’t always mean the payment is delinquent.
- Acquisition Costs: The combination of costs accrued during the acquisition of a note other than the purchase price. This can include due diligence expenses such as external reports and collateral file assessments, recording fees, title insurance, and escrow fees etc.
- ACH Payment: Short for “Automated Clearing House”, this is a banking term describing a type of electronic payment from one bank to another. Mortgage note investors tend to prefer ACH payments on performing notes as they are automatic and reliable.
- Additional Insured: This is a person or entity that is named on the borrower’s insurance policy in addition to the main insured party. You should always seek to be named as an additional party on the hazard insurance policy.
- ARM (Adjustable-Rate Mortgage): This is a type of mortgage loan with an interest rate that changes in correlation with a particular index rate. ARMs tend to start off with lower rates than fixed rate mortgages, but the interest rate tends to increase over time.
- Administrative Fee: Note investors and other lenders often charge fee to borrowers for certain actions or services, such as making a payment by check, or modifying the loan terms.
- Adverse Possession: Controversially, this is when someone obtains ownership of a property by ‘open, notorious, exclusive, and hostile possession’. Often referred to as ‘squatters rights’, state laws vary, and often possession must be held for several years, and the occupier must pay property taxes.
- Affidavit: You’ll come across these from time to time. An affidavit is simply a written statement or declaration that is made under oath before a notary public or other authorized officer.
- Allonge: Most mortgage notes you buy will include an allonge or two. Also referred to as an “allonge to note” or an “endorsement”, an allonge a document detailing the transfer of ownership of a mortgage note between lenders. An allonge is part of the mortgage note and usually has the language to the effect of: “Pay to the Order of ________, without recourse”
- Amortization: This is an important one that you’ll come across every time you invest in mortgage notes. This is where the principle of the loan is paid back alongside interest according to a schedule (see below). As the loan progresses, the loan balance decreases, and the portion of the payment attributed to interest decreases, while the portion of the monthly payment attributed to capital repayment increases.
- Amortization Schedule: This is a schedule or table that shows how each individual monthly payment is split between interest and capital repayment. The schedule will show the gradual payoff of the loan principal over time until ultimately the loan is paid off in full.
- APR (Annual Percentage Rate): A note of caution… the APR is NOT the interest rate on a mortgage note. The APR is calculated according to a calculation decided by the Government that is supposed to reflect the true cost of borrowing money. The APR is always higher than the interest rate on a note.
- Annuity: An annuity is a type of investment vehicle issued by an insurance company that pays guaranteed monthly income payments.
- Appraisal: You’ll sometimes use appraisals to ascertain the value of the real estate that secures your note. There are varying types of appraisal products, from desktop appraisals that use sales data to compile a valuation, through full appraisals based on an extensive physical inspection of the subject property. Appraisals are conducted by licensed appraisers.
- Appreciation: This refers to an increase in value. That could mean an increase in the value of real estate, or it could mean an increase in the value of a note. For example, when you modify non-performing notes into performing notes, the note will appreciate in value.
- Arrears: A note (or borrower) is in arrears when they are behind on payments. The term arrears could also be referring to the actual amount of money that is past due.
- ARV (After Repaired Value): This is the projected future value of a piece of real estate based on repairs or renovation being carried out. There are many ways to calculate and ARV, including a Comparative Market Analysis which is included in a Brokers Price Opinion, and uses sales data to compare values of similar properties in the area.
- Assignment: Like ‘allonge’, an assignment is a common term in mortgage note investing. Often the two are confused because they both deal with transfer of ownership. An assignment is the transfer of an asset between owners. In the note investing world, you might come across an assignment of mortgage, assignment of deed in trust or assignment of security instrument, and you may also come across an assignment of rents clause, where rents are assigned to the lender in the case of a borrower falling into default.
- Assignment Chain: This is simply the ‘chain’ of assignments, creating an auditable chain of ownership of the mortgage from the originating lender through to the current owner.
- Assumable Mortgage: This is a type of mortgage that can be transferred between owners with all of the existing loan terms intact.
So that deals with all mortgage note investing terms starting with A. But don’t worry, there’s plenty more to come…
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