Most property is bought with borrowed money. Understanding the basic mechanics of a loan is the starting point for every financing decision.
The instruments
A promissory note records the debt; a mortgage or deed of trust pledges the property as collateral. Default allows the lender to foreclose.
Terms
Principal, interest rate, amortization, maturity, payment frequency, prepayment provisions and recourse.
Amortization
Payments cover interest first and principal second; the split changes over the loan’s life. A balloon loan leaves principal due at maturity.
Common mistake
Confusing amortization period with loan term. A 25-year amortization on a 10-year term means a large balloon in year ten.
Key Takeaways
- A promissory note records the debt; a mortgage or deed of trust pledges the property as collateral.
- Principal, interest rate, amortization, maturity, payment frequency, prepayment provisions and recourse.
- Payments cover interest first and principal second; the split changes over the loan’s life.
Check Your Understanding
Before moving on, explain in your own words how the ideas in “How Real Estate Debt Works” apply to a property or deal you know, and name one number or document you would need to check.
Action Step
Compute the monthly payment on a stated loan amount at a stated rate and amortization, and the balance remaining after ten years.
This course is educational and does not provide legal, tax, financial, investment or appraisal advice, and does not issue any license, certification or credential. Real estate law, tax rules and licensing requirements vary by state and change over time; consult a licensed attorney, CPA, appraiser or your state regulator for your situation.