LOAN PROGRAMS
ABOUT
EQUITY
When it comes to real estate, equity has two definitions, though both refer to money rather than debt.
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Equity describes a property owner's stake in a property—the amount of money a property is worth minus the debt associated with it.
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Equity also describes a cash investment in a property, usually by multiple parties that create joint venture partnerships (JVs).
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While equity partners typically contribute cash to a deal, some partners contribute assets such as land or buildings.
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An equity investment can be short-term or long-term, depending on the partners involved.
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Unlike debt (loans), which are provided by financial institutions, equity sources range from high-net-worth individuals to private equity funds.
WHAT IS EQUITY?
10 MUST-KNOW FINANCE TERMS
1.
Amortization
The process of paying the principal and interest on a loan through regularly scheduled installments.
2.
Balloon payment
A loan that involves small payments for a certain period of time and one large payment for the remaining principal balance, due at a time specified in the contract.
3.
Basis points (bps)
1/100th of 1% (0.01%), typically stated as a number of basis points over an index rate.
4.
Loan-to-value (LTV)
The ratio between the loan amount and the value of the property. The ratio is commonly expressed to a potential borrower as the percentage of value a lender is willing to finance.
5.
Lock-out period
A period of time after loan closing during which a borrower cannot prepay the loan.
6.
Non-conforming loan
A mortgage loan that does not conform to regulatory limits such as loan amount, loan-to-value ratio, and other characteristics.
7.
Recourse
A loan for which the borrower is personally liable for payment if the borrower defaults.
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8.
PITI
Principal, interest, taxes and insurance, the four components of a mortgage payment.
9.
Prepayment penalty
A penalty sometimes charged to a borrower who makes a prepayment.
10.
Replacement reserves
Monthly deposits that a lender may require a borrower to place in an account for future capital improvements of major building systems; i.e., HVAC, parking lot, carpets, roof, etc.