Real Estate Finance Law
Real estate financing involves raising money for the purchase of, or improvements to, real estate, real estate investments, and government-backed approaches to improving blighted urban areas. It is based mostly on state law.
Home mortgages. Mortgages are long-term loans provided by banks and other lenders to those interested in buying real estate. The property being bought is given as collateral for the loan. In this situation, the buyer is called the mortgagor, while the lender is called the mortgagee. The loan is finalized at a loan closing, where the buyer gives the lender a lien on the property, which entitles the lender to foreclose on the property should the buyer fail to repay the loan.
The typical mortgage loan is for either 15 years or 30 years. The monthly payments are sometimes called PITI payments because they pay for principal, interest, taxes, and insurance. In the early days of the loan, the payments consist of almost all interest, with very little principal being repaid. At the loan matures, the percentage that is principal and the percentage that is interest gradually reverse, so that most of the final payments are for principal rather than for interest.
Mortgages come in many different flavors, but the two most common for homeowners are fixed-rate and variable-rate or adjustable-rate (called ARMs). A fixed-rate mortgage provides a single interest rate that will apply throughout the life of the mortgage. A variable-rate mortgage provides an interest rate that fluctuates as rates fluctuate. Which one is best depends upon where you think interest rates are going to go. If you think rates are going to go higher during the life of the mortgage, a fixed-rate mortgage is the better choice. If, however, you believe that rates will go down, the variable-rate mortgage is the one to opt for.
Low-income mortgages. The Government National Mortgage Association (called Ginnie Mae), the Federal National Mortgage Association (called Fannie Mae), and the Federal Home Loan Mortgage Corporation (called Freddie Mac) are all government-inspired entities that provide home mortgages to low- and moderate-income families. They don't actually lend the money to the homeowner; instead, they enable loans by agreeing to buy mortgages from lenders on the secondary market. Although Congress created both Fannie Mae and Freddie Mac, and the federal government regulates them, both are privately owned. Ginnie Mae, on the other hand, is a corporation within the Department of Housing and Urban Development.
Reverse mortgages. Reverse mortgages are a means for older homeowners to raise money without having to repay it during their lifetimes. The homeowner typically has to be at least 62 years of age and must occupy the home as the principal residence. Under a reverse mortgage, the homeowner borrows money, either as a lump sum or as a monthly payout, but doesn't have to repay it until either the home is sold or the last borrower dies.
Commercial real estate. Commercial real estate transactions, such as shopping mall and housing developments, can involve a variety of loan types, including primary loans such as traditional mortgages and construction loans, as well as secondary or subordinate loans such as conduit programs and mezzanine financing. The secondary loans are subordinate to the primary loans and are often called gap loans because they are designed to pay for cost overruns prior to completion of the project.
REITs. Those who want to buy real estate as an investment option have choices. They can buy property, hold it, and hope to sell it for a profit, or they can buy it and generate rental income from it. To succeed, real estate investors generally need both a lot of money and a lot of knowledge about real estate. Being a landlord is not always easy.
In recent years, a real estate investment option has gained popularity with those who have some money but perhaps not enough knowledge of real estate management. Real Estate Investment Trusts are (often) publicly traded companies that buy, develop, and manage property, primarily for the rental income. One appeal for the average investor is the ease of getting into and getting out of an investment opportunity because buying and selling stock is, of course, far easier than buying and selling the actual real estate. Although almost all REITS invest in property for the rental income, a few rely on interest income from mortgage loans.
TIFs. Tax increment financing is an economic development tool that is designed to help revitalize blighted urban areas. A city or town will designate a blighted area as a tax increment district. Once the district is identified, the city or town sells bonds to pay for new streets, lights, sidewalks, and other improvements. The idea is that a combination of the new improvements and a freeze on property taxes at the old rates will entice businesses into the area. The additional tax revenues generated by the new businesses are used to service the debt.