The mortgage is the legal document that secures the property as collateral for the purchase of a property. This secures the repayment of funds if the loan is not repaid to the lender according to the terms of the mortgage.
2. Down Payment
An investor or buyer generally has to put some of their own money into the purchase of a property in the form of a down payment. This can be 10% of the purchase price, 20%, or even more depending on the type of property and the perceived risk to the lender. Properties like restaurants often require larger downpayment than apartment buildings because there is a greater chance of foreclosure for restaurants.
3. Promissory Note
A promissory note accompanies the mortgage and is the legal promise a borrower makes to the lender that they will repay the funds.
Points can be prepaid interest on borrowed funds (called discount points) and origination fees paid to the lender as a fee for securing the mortgage (called origination points). A point is usually one percent of the mortgage amount. If a buyer borrows $300,000, one point would be $3,000.
5. Loan to Value Ratio
Commonly referred to as an LTV, the loan to value ratio is the amount borrowed against a property to the appraised value of the property being secured by a mortgage. A loan of $200,000 on an office building appraised at $250,000 would have an LTV of $200,000 / $250,000 or 80%.
6. Principal and Interest
Every mortgage payment is made up of principal and interest. The principal is repayment of the loan balance, and the interest payment is interest to the lender for the use of the principal.
Loans are generally repaid in equal installments on a monthly, quarterly, or yearly basis. Each payment is made up of principal and interest, and although the monthly payment doesn't change, in a fixed-rate mortgage, the portion paid on principal increases over the life of the loan, and the portion paid in interest decreases.
8. Balloon Payment
Commercial loans are often paid over a long period of time, such as 20 years, but have a date when the balance of the loan is due. A loan may be amortized for 20 years, but require a balloon payment for the balance left on the loan at that point. The term "balloon" indicates that the final payment is large.
9. Mortgage Payment
Mortgage loans are paid back to a lender over time, and mortgage payments are usually paid on a monthly basis, though some are paid quarterly, bi-annually, or annually. The mortgage and promissory note state the repayment terms.
10. Closing Costs
In addition to the down payment, there are costs to purchase a property. These may include lender fees, such as points, prepaid fees like prepaid property taxes, and other costs such as title insurance, surveys, and notary fees.