The Basics of Real Estate Finance

The Basics of Real Estate Finance

Whether you are making plans to purchase a new home or to invest in real estate, you likely have plans to apply for a mortgage in the near future. Real estate prices can be astronomical, and a mortgage gives you the option to fund your purchase without having to save up the full sales price and closing costs. If you are preparing to apply for a real estate loan soon, consider these basic concepts as you explore the loan programs available.

The Interest Rate

Because a real estate loan may be hundreds of thousands of dollars or more and because the loan term may be 20 or 30 years in length in many cases, the interest charged on this type of loan can equate to a considerable amount of money. Finding a loan with the lowest interest rate possible is critical, but there are other factors to consider as well.

The Loan Term

The loan term describes how many months or years your loan payments will continue for. Most real estate loans have a fixed term that is fully amortizing. This means that at the end of the loan term, the loan balance will be completely repaid. The longer the loan term, the lower the monthly payments in most cases. You can use an online mortgage payment calculator with an amortization table to determine the monthly payment and the total interest charged on the loan based on various interest rates and loan terms.

The Closing Cost and Points

Most loans have closing costs associated with them. The lender may have a fee that they charge for setting up the loan for you. If you work with a mortgage broker, you may have to pay a broker fee. Many loans require tax and insurance escrows, so you may have to pay money to fund these escrow accounts. Some lenders also give you the option to use points to adjust your interest rate, monthly payment and closing costs. A point equates to one percent of the loan amount. You may pay an extra point to buy a lower interest rate. You may also receive a point to pay some of your closing costs, but your rate may be higher as a result.

These are the most critical basic factors that you need to pay attention to when shopping for a new loan. You also may consider the reputation and experience of the lender before you decide which loan to apply for. By focusing your attention on these points, you can make a more educated decision about your real estate loan.

Daniel Palmier is a leading Boston CEO, Real Estate Investment Manager, and Founder of UC Funds.

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