Financing

Definition

Financing in real estate refers to the method of securing funds through borrowing in order to purchase property. This process typically involves the use of various financial instruments, including mortgage loans, seller financing, and installment sales. Financing allows buyers to acquire property without fully depleting their liquid assets upfront.

Examples of Financing:

1. Obtaining a Mortgage Loan:

   • A traditional mortgage loan from a bank or other lending institution, secured by the property being purchased.

2. Assumption of a Mortgage:

   • The buyer takes over an existing mortgage from the seller, under the same terms and conditions.

3. Seller Financing (Purchase Money Mortgage):

   • The seller takes on a role similar to that of a bank, providing a loan to the buyer as part of the purchase price.

4. Installment Sale:

   • The buyer agrees to pay the seller the purchase price over time through a series of installments.

Frequently Asked Questions (FAQs)

What is the difference between a mortgage and a loan?

• Answer: A mortgage is a specific type of loan used solely for purchasing real estate. The property itself serves as collateral for the loan. A loan, in general, can be used for a variety of purposes and is not necessarily secured by real estate.

How does the interest rate affect my mortgage?

• Answer: The interest rate determines the cost of borrowing money. Higher rates mean higher monthly payments and more money paid over the life of the loan, whereas lower rates reduce the overall cost of the loan.

What is an adjustable-rate mortgage (ARM)?

• Answer: An ARM is a type of mortgage with an interest rate that may change periodically, typically in relation to an index. This means the monthly payments can fluctuate over time.

Can I finance investment properties similarly to a primary residence?

• Answer: Yes, but the terms and requirements for financing investment properties can be more stringent, often requiring higher down payments and interest rates compared to primary residences.

What is the role of credit score in securing financing?

• Answer: A higher credit score can qualify a borrower for better loan terms and lower interest rates. Lenders use credit scores to assess the borrower’s reliability and risk.

Related Terms

Mortgage

A mortgage is a loan specifically meant for purchasing real estate, where the property is used as collateral to secure the loan.

Creative Financing

Creative Financing refers to the use of non-traditional methods to fund real estate purchases, including techniques like lease options, seller financing, and more.

Assumption of Mortgage

This is the action where a buyer takes over the seller’s existing mortgage, continuing with the same terms as originally agreed upon by the seller.

Installment Sale

An installment sale is an agreement where the buyer pays for the property over a period of time in installments, rather than a lump sum upfront.

Online Resources

1. Investopedia - Real Estate Financing
2. National Real Estate Investor - Financing
3. Nerdwallet - Guide to Mortgages

References

1. Brueggeman, W. B., & Fisher, J. D. (2011). Real Estate Finance and Investments. McGraw-Hill/Irwin.
2. Geltner, D., Miller, N. G., Clayton, J., & Eichholtz, P. (2006). Commercial Real Estate Analysis and Investments. South-Western Educational Pub.

Suggested Books for Further Studies

1. Barron’s Real Estate Licensing Exams with Online Digital Flashcards by Jack P. Friedman, J. Bruce Lindeman
2. What Every Real Estate Investor Needs to Know About Cash Flow… And 36 Other Key Financial Measures by Frank Gallinelli
3. Principles of Real Estate Practice by Stephen Mettling

Real Estate Basics: Financing Fundamentals Quiz