Common financing terms to understand
Loan-to-value ratio :
The percentage of the value of the property for which a mortgage is required. This ratio is important in determining whether or not default insurance is required, and if so, what the cost of that insurance will be (see “Mortgage Insurance”) For example, if the property value is $200,000, the down payment available is $20,000 and the required mortgage is $180,000. The LTV is $180,000 / $200,000 or 90%.
Underwriting :
The process of deciding whether or not to lend you money (or how much to lend you) based on all the information you have given the lender. Every lender has a different underwriting process and lending criteria which differ to some (usually small) extent from other lenders.
Cap Rate :
Capitalization rate, or cap rate for short, is used to measure the annual rate of return on a real estate investment based on the profit that property is expected to generate. Simply put, it’s the ratio between the net
operating income (NOI) and purchase price. Cap rate is calculated by dividing net operating income (NOI) in the first year by the property purchase price. (NOI
excludes loan costs if you used financing).Example: Say you purchase a property for $150,000.The expected NOI in the
first year is $12,000.
$12,000/$150,000 = 0.08
Cap rate: 8%Net Operating Income:
Net operating income (NOI) is a measure of a real estate investment property’s potential to be profitable. It’s calculated by estimating the property’s revenue and subtracting all operating expenses such as repairs, maintenance, property taxes, HOA fees, etc. NOI does not include mortgage payments.
Cash Flow :
Cash flow is the amount of money you can pocket at the end of each month, after all operating expenses (including loan payments) have been paid. If you spend less money than you earn, your cash flow will be positive. If you
spend more money than you earn, your cash flow will be negative.- Rental income – all operating expenses (including loan payments) = Cash flow
Cash-on-Cash Return :
This figure is the ratio of annual pre-tax cash flow to the total amount of cash invested, expressed as a percentage. Cash-on-cash return measures the yearly return in relation to how much money you put down. It doesn’t take into consideration some of the other benefits of rental property ownership, including appreciation, loan paydown, depreciation and other tax benefits. Whereas calculations based on standard ROI take into account the total return on an investment, cash-on-cash return only measures the return on the actual cash invested. It’s the cash you’ve got left after one year, divided by the cash you’ve invested.
Debt-to-Equity Ratio :
In real estate, debt-to-equity (D/E) ratio is a measure of ownership. This ratio helps you determine how much of your property is actually yours (if you took out a mortgage to finance it) and how much you owe in debt.
FSBO :
For Sale by Owner (FSBO) is a term used to describe a real estate owner that is selling his or her property without using a real estate agent or listing the property on the MLS. FSBO listings are often seen toward the peak or bottom of the real estate market cycle. Owners selling at the top of the market don’t see the need to pay a real estate commission when there is more demand from buyers than there is supply of houses. On the other hand, FSBOs selling at the bottom of the market may have little or no equity in their property, and simply can’t afford to pay a real estate agent commission.
CMA :
Comparative Market Analysis (CMA) is a report that shows active and sold listings, listings taken off of the market, and listings that expired without being
sold during a specific time period and in a specific neighborhood or geographic area. CMAs are usually generated by real estate agents using data from the
MLS. Because not every property bought and sold is listed on the MLS, a CMA may lack some specific property data, but normally will serve as an accurate guide for current market trends.PITI :
PITI is an acronym for a mortgage payment that includes Principal, Interest, (Real Estate) Taxes, and Insurance. The monthly payment of most residential mortgages is PITI.
Example: $1,000 / month principal and interest payment + $40 / month homeowner’s insurance + $200 / month property taxes = $1,240 PITI per month
Principal :
The amount of money owing on your mortgage, including accrued unpaid interest.
Interest :
The amount of money a lender or financial institution receives for lending out money.
Refinance :
Obtaining a new mortgage on an existing property. You might be looking for more money, a better rate, or different prepayment terms. As of July 9, 2012, the maximum amount you can refinance your mortgage to is 80% ofcurrent appraised value.
