Financing
Mortgage Basics
A mortgage is a lien securing a debt; the mortgagee lends and the mortgagor borrows. Know the promissory note (the debt) vs. the mortgage/deed of trust (the security instrument). In title theory states the lender holds title; in lien theory states the borrower retains title subject to a lien. Traps: confusing the parties, and confusing foreclosure with a deficiency judgment.
Loan Types and Terms
Distinguish conventional, FHA-insured, VA-guaranteed, and USDA loans. Understand fixed-rate vs. adjustable-rate mortgages (rate caps, index, margin, teaser rate), balloon loans, interest-only, and graduated payment loans. Know LTV (loan amount ÷ value), PMI (typically required above 80% LTV), and PITI (principal, interest, taxes, insurance).
Calculations and Rules of Thumb
Use the loan-to-value and debt-service formulas. Lenders use qualifying ratios (front-end housing and back-end total debt). Discount points are prepaid interest that lower the rate; one point = 1% of the loan amount. Amortization questions often ask for monthly payment components: interest = balance × rate ÷ 12.
Worked Example
A $250,000 home with 10% down gives a $225,000 loan. LTV = 225,000 ÷ 250,000 = 90%. Because LTV exceeds 80%, PMI is typically required. Two discount points = 2% × $225,000 = $4,500.
Traps
Watch for questions that mix up mortgagee/mortgagor, confuse points (loan-based) with origination fees, and assume PMI is permanent-it generally terminates when LTV reaches 78–80%.