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Important Terms

� Mortgage - The Mortgage is the legal document that is filed at the local courthouse or recorders office that secures the property as collateral for the purchase of a property. This document secures the repayment of funds, because the lender may foreclose, or take back the property, if the loan is not repaid to the lender according to the terms of the mortgage.

� Promissory Note - The legal promise a borrower makes to the lender that they will repay the funds. This note accompanies the mortgage.

� Loan to Value Ratio - The ratio of the amount borrowed against a property to the appraised value of the property being secured by a mortgage. For example, a loan of $200,000 on an office building appraised at $250,000 would have a loan to value ratio of $200,000 / $250,000 or 80%. Loan to Value Ratio's are commonly referred to as LTV's.

� Points - Points refer to both prepaid interest on the borrowed funds, called discount points, and to origination fees paid to the lender as a fee for securing the mortgage, called origination points. A borrower can "buy down" an interest rate by prepaying some interest to the lender. A point is generally one percent of the mortgage amount. If a purchaser borrows $200,000, one point would be $2000.

� Down Payment - A buyer or investor will generally have to put some of their own money into the purchase of a property. Although there are times on particular properties with particular investors that a loan for 100% of the purchase price can be obtained, most purchases require a down payment. The down payment can be 10% of the purchase price, 20%, 30% or greater depending on the type of property, the strength of the borrower and the perceived risk to the lender. For example, taverns typically require a more substantial down payment than 4 unit apartment buildings because taverns have a much greater chance of failing and falling into foreclosure.

� Closing Costs - There are costs to purchase a property in addition to the down payment. These costs may be lender fees, such as points, or prepaid fees, such as prepaid property taxes, or pro-rated reimbursements. Closing costs will be discussed in more detail in the next section.

� Mortgage Payment - Mortgage loans are paid back to the lender over time. The Mortgage and Promissory Note outline the repayment terms. Mortgage payments are typically monthly, but some loans may be paid quarterly, bi-annually or annually.

� Principal and Interest - Each mortgage payment is made up partly of principal and partly of interest. The principal component is repayment of the loan balance. The interest payment is interest to the lender for the use of the principal.

� Amortization - Loans are typically repaid in equal monthly, quarterly or yearly installments. Each payment is made up partially of principal and partially of interest. Although the monthly payment does not change, in a fixed rate mortgage, the portion that is paid on principal increases over the life of the loan, and the portion that is paid in interest decreases.

� Balloon Payment - Many commercial loans are amortized over a long period of time, such as 15 or 20 years, but have a specific date when the balance of the loan is due and payable. For example, a loan may be amortized for 20 years, but require a balloon payment in 5 years for whatever balance is left on the loan at that point.

Loren Keim is the author of "The Fundamentals of Listing and Selling Commercial Real Estate"