Financing, Valuation and Appraisal Fundamentals
Financing Fundamentals
Wisconsin is a mortgage state, not a deed-of-trust state: the borrower gives a promissory note (the debt) and a mortgage (the lien) to the lender. The note controls the obligation; the mortgage secures it against the property. Priority generally follows recording order, which is why a purchase-money mortgage is recorded immediately and why subordination agreements matter in refinancing.
Know the loan landscape: conventional, FHA (lower down payment, mortgage insurance), VA (eligible veterans, no monthly MI but a funding fee), and USDA rural programs. Fixed-rate versus adjustable, amortization schedules, and the difference between interest rate and APR appear constantly - APR folds in fees and is generally higher than the note rate.
Disclosure and servicing rules
- A Loan Estimate must be delivered promptly after application (generally within three business days).
- The Closing Disclosure must be received by the consumer at least three business days before consummation.
- Escrow/impound accounts collect taxes and insurance; RESPA limits escrow cushions.
- Borrower-paid private mortgage insurance must terminate at 78% loan-to-value by amortization schedule and may be cancelled at the borrower's request at 80%.
- Lenders must make a good-faith ability-to-repay determination.
Worked example
A $400,000 purchase with 10% down is a $360,000 loan - 90% LTV, above the 80% line, so PMI applies until the balance amortizes to $320,000 (80%) or terminates at 78%.
Trap: assuming a pre-approval letter guarantees a loan, or that a mortgage is the debt itself; the mortgage is only the lien.
Valuation and Appraisal Fundamentals
Value in appraisal terms means market value - the most probable price in a competitive, arm's-length transaction, with both parties acting prudently and without undue stimulus. Distinguish it from price (what a transaction produced) and cost (what it takes to build).
The three approaches
- Sales comparison - the default for residential property; adjust comparables for differences in features, condition, size, and terms of sale.
- Cost - reproduction or replacement cost minus depreciation plus land value; used for new or special-purpose property.
- Income - capitalization of net operating income; used for investment property. Gross rent multiplier is a shortcut: value = gross monthly rent × GRM.
Highest and best use is the reasonable, legally permissible, financially feasible, maximally productive use - it can differ from current use.
Appraisers are licensed under Wis. Stat. ch. 458 and follow USPAP. A licensee may prepare a comparative market analysis or price opinion for a client but may not perform an appraisal or call a CMA an appraisal.
Worked example
Duplex rents $2,400 per month; comparable sales suggest a GRM of 120. Indicated value ≈ $288,000. A cap-rate approach on $18,000 NOI at a 7% cap rate gives ≈ $257,000 - the gap signals that assumptions drive the answer, so read which method the question uses.
Trap: adjusting a comparable in the wrong direction. If the comparable is superior to the subject, the adjustment to the comparable is downward, which raises the indicated value of the subject.