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Chapter 25: Mortgages & Financing
Hawaii Real Estate Exam Prep Course
7
Real Estate & Planning
Professional
02/14/2014

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Term
Promissory Note
Definition
a legal instrument (required by a lender for a loan) in which the borrower promises to pay a debt over a specified period of time.

The promissory note is typically NOT recorded.
Term
Mortgage
Definition

legal instrument whereby the mortgagor (borrower) pledges her property to the mortgagee (the lender) as security for a loan (lien).

 

The lender will provide a loan only if the borrower gives the lender a mortgage.

 

It is crucial for a morngagee to recored its mortgage in order to protect its interest in the event of foreclosure. Although it does NOT have to be recorded to be enforceable.

Term
Hypothecate
Definition

To pledge property as security or collateral for a debt.

 

Generally, there is no physical transfer of the pledged property to the lender, nor is the lender given title to the property, though he or she has the right to sell the pledged property in the case of default.


http://legal-dictionary.thefreedictionary.com/hypothecating

Term
Loan to Value Ratio (LTV)
Definition

 the ratio (%) between the sum of money lent in a mortgage agreement and the lender's valuation of the property involved. 


ex.) $500K value, LTV 80% = $400K loan

20% Down Payment = $100K

Term
Private Mortgage Insurance (PMI)
Definition

insurance charged to a borrower when the mortgage loan-to-value ratio is above 80% of the property's appraised value at loan closing. 

 

PMI is charged because these borrowers are higher risk.

Term
Lien Theory
Definition

this theory used for financing real property dictates:

 

the mortgagee (lender) holds only a secured interest.

the mortgagor (borrower) is the legal owner of the land.

 

The mortgagee may not take possession before foreclosure.

Term
Title Theory
Definition

this theory used for financing real property dictates:

 

a trustee (a neutral 3rd party) holds legal title until the loan has been satisfied or foreclosed

 

This instrument is a deed of trust or trust deed

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