Acceleration. The act of a lender declaring a note immediately due and payable before the maturity date. The right to take this action is triggered by some violation of the terms of the loan.
Adjustable Rate Mortgage (ARM). A mortgage loan having an interest rate that can be raised or lowered over time based on periodic changes in a monitored index . (See definition of "index" below.)
Amortized Loan. A loan that is repaid in a series of installments each of which contains a portion that is applied to reduce the principal amount of the loan and a portion that is applied to pay interest. As time goes on, each successive payment allocates a larger portion to principal reduction and a smaller portion to interest payment until the outstanding balance is ultimately reduced to zero. If the loan has a fixed rate of interest, each payment is the same dollar amount throughout the course of the loan. If the loan has an adjustable rate of interest, each payment at each particular interest rate is the same dollar amount. For example, while the interest is 8.0%, all of the payments on a $100,000 loan for 30 years will be $733.77. If the interest rate changes to 9.0%, all of the payments will be $804.62 while the rate remains at the 9.0% rate.
Annual Cap. The maximum amount the interest rate on an adjustable rate mortgage can be raised or lowered in the course of one twelve month period. If the interest rate at the start of the period is 8.0% and the Annual Cap is 2.0% the interest will be adjusted no higher than to 10.0% during that period even if the index rises over 2.0%. (see definition of "index" below)
Annual Percentage Rate (APR). A more precise description of the cost of money which reflects not only the actual interest rate but also the cost of certain expenses charged as part of the process of obtaining the loan. The actual items that must be calculated into the APR are determined by the Federal government. If the interest rate on a loan was 8.0%, the APR would typically be somewhere around 8.3% - 9.0% depending upon what fees were charged and the amount of each fee.
Appraised Value. There are several types of appraisal depending on the goal. Values determined for insurance purposes typically reflect replacement cost of the improvements. Values needed for multi-unit and commercial real estate are primarily based on the net operating income (or the potential net operating income) of the property. Values needed for residential real estate are usually determined on the basis of comparable sales. (See the definitions of comparable sales and net operating income below and see J. P. Vaughan’s article "What Is Market Value" in the How-To section of this site.)
Assumable Mortgage. An existing mortgage which allows the next purchaser of a property to be liable for the payments and other obligations of the note and mortgage. Depending on the type of loan, the assumption of the obligation by this next purchaser may or may not require a qualification and approval process and may or may not release the original mortgagor (borrower) from further liability. A written release from the mortgagee (lender) is required to relieve the original mortgagor of responsibility. Without a release, the original mortgagor must make the payments (and suffer harm to a credit report if they are not made) if the person assuming the mortgage fails to do so.
Balance. The outstanding dollar amount owed on a loan. Also referred to as loan balance or mortgage balance.
Balloon Payment. An installment payment which is larger (most often much larger) than the other scheduled payments. It is usually the last payment. If a note is written for $50,000 at a fixed 9.0% rate of interest with payments based on an amortization schedule of 30 years and a balloon payment due in 5 years, the first 60 payments will each be $402.31 (the normal payment for a 30 year loan at 9.0% interest) and the last payment will be $47,940.15 which will be the outstanding balance remaining after the 60th payment.
Blanket Mortgage. A single mortgage which attaches to more than one property. (See definition of "mortgage" below.)
Broker. An individual who acts as an intermediary between two or more parties for the purpose of negotiating a transaction agreeable to all of the parties. In lending, the broker arranges and negotiates loan amounts, interest rates and loan terms between borrowers and lenders. Depending on the type of loan, the state wherein the transaction is occurring and contractual arrangements, the broker may represent the borrower, the lender or not have a fiduciary responsibility to either. (See definition of "fiduciary responsibility" below.)
Buy Down. A payment of discounts points in exchange for a lower rate of interest. It has the effect of providing the lender with a greater yield today in exchange for a lower yield in the future. (See definition of "discount points" below.)
Cash Flow. The net operating income minus the total of all debt service payments. (See definition of "net operating income" below.)
Cash Out. Cash given to the borrower from the proceeds of a loan. While relatively common as part of a refinance, it is uncommon, but not impossible, as a benefit of a small percentage of non-conforming loans used for a purchase.
Closing. The formal meeting where loan documents are signed and funds disbursed. Note, however, that Federal law requires that funds not be disbursed for three business days on certain loans where personal residences serve as the security. (See definition of "rescission" below.)
Closing Costs. The expenses which borrowers incur to complete the loan transaction. These costs may include title searches, title insurance, closing fees, recording fees, processing fees and other charges.
Combined Loan-to-Value (CLTV). The total of all loans relative to the value of the property. If a property has a value of $100,000 and three loans totaling $125,000, the CLTV is 125% ($125,000 / $100,000).
Commitment. The notification that a lender has approved a loan. Virtually all commitments are issued conditionally; that is, subject to some list of conditions that must be satisfied prior to funding actually taking place. Typical conditions include appraisals of a certain value, clean title, verification of representations by the borrower, etc.
Comparable Sales. As part of the appraisal process, those relatively recently sold properties which will be compared to the subject property (the property being appraised) for the purpose of forming an opinion of value for the subject property. The facts and details of the comparable properties will be compared to those of the subject. In an urban setting, to be of credible assistance in this process, comparable sales must have the same use as the subject, have many similarities to the subject in terms of size of house, size of lot, construction, bedroom count, room count, floor plan, amenities, street traffic and be in the same neighborhood and have been sold in the recent past (preferably no more than six months) by way of an "arms length" transaction (i.e., not sold to a relative or friend and not sold due to a forced sale or distress sale) and be within one mile of the subject property. More liberal standards will apply for rural property and some suburban properties but the basic premise holds, the more similar the comparable sales are to the subject property, the more accurate the value assigned to the subject property will be. Lenders will often compensate for the less precise nature of rural appraised values by allowing only lower loan-to-value ratios than those in urban settings, usually 10% lower. (See definition of "loan-to-value" below.)
Conforming Loan. A loan which has underwriting criteria consistent with (i.e., conforming to) those strict guidelines of Fannie Mae, Freddie Mac, FHA or VA. These are typically the lowest interest rate loans with very good terms. (See definitions of "Fannie Mae", "Freddie Mac", "FHA", "VA" and "underwriting" below.)
Conventional Loan. A conforming loan with no government guarantee; that is, a Fannie Mae or Freddie Mac loan. (See definition of "conforming loan" above.)
Credit Line. A loan that allows revolving use of the credit; that is, after funds have been borrowed and repaid they may be borrowed again without applying for a new loan. Typically, a credit limit is established and some or all of the available funds can be optionally disbursed at closing. Undisbursed funds are available for the borrowers use at any time. Payments are required only on the outstanding balance. They are similar in use to a credit card except that they typically use checks to access the funds. They are inexpensive, effective tools for investors.
Debt Ratio (DR, D:I). Also known as debt to income. The ratio of the total of minimum monthly debt payments to gross monthly income. If minimum monthly payments on a credit card, auto lease, and mortgage (PITI) were $30, $220 and $750 respectively and the gross monthly income was $3000, the debt ratio would be 33.33% ($1000 / $3000). Only debt obligations that will be in place after the loan has funded are considered. Payments for food, utilities, entertainment, medical bills, etc. are not included in the calculation. Contractual obligations for rent (e.g., a lease) would be included in the calculation. The housing ratio in this example would be 25.0% ($750 / $3000).
The preferred candidate for conventional loans typically would have debt ratios of 28% for housing and 36% for the total with the maximum ratios allowed (on a case by case basis with compensating factors; i.e., some other strong positive to offset the negative of the higher debt ratio) being around 30% / 40% (housing / total). FHA and VA loans allow a total of approximately 41.0%. Non-conforming loans may allow total debt ratios as high as 55% or so. True "hard money" loans seldom consider debt ratios. (see definitions of "PITI", "Housing Ratio", "Non-conforming Loan" below)
Debt Coverage Ratio (DCR). A ratio used in underwriting loans for income producing property which is created by dividing net operating income by total debt service. Ratios of at least 1.10 are generally required with ratios of 1.20 and higher considered the norm. (See definition of "underwriting" below.)
Deed of Trust (DOT). DOT’s are similar to mortgages in that they serve as security for a loan by encumbering real estate. However, a mortgage is between two parties (borrower and lender) and a deed of trust involves three parties (borrower, lender and trustee). The trustee holds the property in trust as security for the payment of the debt and can sell the property if the borrower defaults.
Default. Failure to meet all of the commitments and obligations specified in the mortgage or deed of trust. Defaults usually give the lender the right to accelerate payments and start foreclosure.
Discount Points. One point equals one percent of the loan amount. Paying points has the effect of giving the lender a higher yield. Two points on a $100,000 mortgage would cost $2,000 ($100,000 x 0.02).
Down Payment. The portion of the purchase price paid by a buyer to a seller from sources of funds outside of those provided by a lender.
Due Diligence. The act of carefully reviewing, checking and verifying all of the facts and issues before proceeding. In lending it is, among other things, verification of employment, income and savings; review of the appraisal; credit report; and status of the title.
Due-on-Sale. A typical clause of a mortgage requiring that the outstanding balance be paid in full on the sale of the property. In recent years the language of this clause has been broadened in many mortgages to include as the triggering event not only the actual sale of a property but the transfer of any interest in the property.
Equity. The value of the unencumbered interest in real estate as determined by subtracting the total of the unpaid mortgage balances plus the sum of any current liens against the property from the property’s fair market value.
Escrow Account. An account from which funds can be disbursed only for specified reasons; i.e. the money is held in trust for a specific use. In lending, these accounts are most often used to hold and disburse real estate taxes and hazard insurance premiums which have been paid in advance (usually on a monthly basis) by the borrower.
Fair Market Value. See J.P. Vaughan’s article, What Is Market Value?
Fannie Mae (FNMA). Federal National Mortgage Association, a federally chartered corporation that purchases mortgages and packages them to sell as securities.
Fee Agreement. An agreement between a borrower and a broker which normally specifies the relationship between them and the amount of compensation to the broker.
Fiduciary Responsibility. An obligation to act in the best interest of another party. This type of obligation typically exists when one person places special trust and confidence in another person and that responsibility is accepted.
First Mortgage. That mortgage which is recorded at the earliest time. The time of recording is the sole criteria. Size of loan and type of mortgage are immaterial. When the first mortgage is paid off and released, the second mortgage (if any existed) becomes the first mortgage.
Fixed Rate Mortgage. A mortgage with an interest rate that remains the same through the life of the loan.
Foreclosure. The process by which the mortgagor’s (borrower’s) rights to a property are terminated. While the general process is similar from state to state, the actual procedures tend to vary greatly.
Freddie Mac (FHMLC). Federal Home Loan Mortgage Corporation, a federally chartered corporation that purchases mortgages and packages them to sell as securities.
Gross Monthly Income. Income before deductions for taxes, social security, saving plans, court ordered child support, etc.
Hard Money Loan. A loan that is underwritten with the condition and value of the property as the primary criteria for approval. Secondary issues may include the credit of the borrower, the ability of the borrower to repay the loan and/or the ability of the borrower to manage the property or successfully complete a rehab and sell the property. Owner occupancy, debt ratios and other issues are seldom a factor. Appraisals rather than purchase prices are used to determine value. Cash out purchases are often allowed and are another key benefit. These loans are usually approved within days and are often funded in two weeks or under with times as short as two or three days not uncommon. The cost for the benefits of speed of funding, lax underwriting and other advantages is typically a moderately high interest rate (usually low to mid teens) and high points (usually 5 to 10). (See definition of "underwriting" below.)
Hazard Insurance. Insurance to provide compensation if the improvements are damaged or destroyed. It is almost always a requirement of loans.
Home Equity Loan. In the most literal sense, this expression applies to virtually all loans (first mortgages and second mortgages, fixed and adjustable interest rates, credit lines and fully amortizing loans, etc.) placed on an owner occupied property when the loan-to-value after the Home Equity Loan closes is no higher than 100%. That is, it is a loan secured by the available equity of an owner occupied residential property.
However, in many (if not all) areas of the country, intense marketing (from banks in particular) has caused this expression to take on one particular meaning, that of a credit line (usually a second mortgage with an adjustable interest rate) secured by a residence. They are sometimes called a Home Equity Line of Credit. Since many of these loans are promoted with features such as easier application forms, fast approvals, drive-by appraisals and low or no closing costs they don’t register within the minds of many consumers in the same way as the typical first mortgage used to purchase a home. It is not uncommon, even after just signing the documents at the closing, for some consumers to think there is not even a mortgage involved! They can be used as low cost tools for investors.
Initial Note Rate. The rate of interest that takes effect at the closing of a loan and which determines the monthly payment(s) for the early portion of the loan. The period of time during which this rate applies is often short and the rate may be lower than
Index. The published cost of money that serves as the minimum basis for determining the interest rate for an adjustable rate mortgage. Among the commonly used indices are the Prime Rate (Prime), the London Interbank Offering Rate (LIBOR), the Cost of Funds (COF) and the 1 year Treasury Bill (1 year T). The particular index is generally, though not always, selected based on how often an interest rate is supposed to adjust. Loans which allow monthly interest rate adjustments commonly use the Prime Rate. Loans that adjust semi-annually may use LIBOR. The 1 year Treasury and the Cost of Funds are often used for loans which adjust on an annual basis. There are other Treasury instruments which are used for 3 and 5 year adjustment periods.
The interest rate of the loan is determined by adding a margin to the index. The size of the margin is typically a function of the index used and the credit worthiness of the borrower. Typical margins on a Prime Rate based loan would be 0.0 to 5.0 so that if the Prime Rate were 8.25% and the margin were 2.0 (typical for an "average" borrower), the interest rate would be 10.25% (8.25 + 2.0).
Interest Rate. The percentage of the loan amount charged for borrowing money; i.e., the cost of the money expressed as a percentage.
Jumbo Loan. A loan larger than the maximum allowed by conforming loans. The threshold amount has traditionally been adjusted more or less on an annual basis and has been in the low $200,000’s. Banks and mortgage brokers can quote the current threshold. They are typically available at interest rates slightly higher than those of conforming loans and typically require the same underwriting standards as conforming loans. (see definition of "conforming loan" above)
Lien. A claim on a property of another as security for money owed. Examples of types of liens would include judgments, mechanic’s liens, mortgages and unpaid taxes.
Lifetime Cap. The highest amount over the initial interest rate that an adjustable mortgage can be raised. Lifetime caps are typically in the range of 5.0% - 7.0%. If the initial interest rate is 5.25% and the lifetime cap is 6.0%, the highest interest rate a borrower could pay during the course of the loan would be 11.25% (5.25% + 6.0%).
Loan-to-Value (LTV). The ratio of the size of the loan to the value of the property. If the loan is $80,000 and the value of the property is $100,000 the LTV is 80% ($80,000 / $100,000).
Loan Package. The organized group of documents that contains all of the information required to obtain an underwriting decision of loan approval or loan denial. Depending on the type of loan and the particular lender, a package may contain some or all of the following as well as other documents: loan application, statement of use of funds, statement of net worth, P & L statements, tax returns, pay stubs, statements from various types of banking and investment accounts, property appraisal, letters of explanation, credit report, verification of employment, verification of housing payments, purchase agreement, etc. (See definition of "underwriting" below.)
Margin. A constant (fixed) amount over an index that determines a lender’s yield on an adjustable rate loan. The interest rate of an adjustable rate loan is determined by adding a margin to an index. The size of the margin is typically a function of the index used and the credit worthiness of the borrower. Typical margins on a Prime Rate based loan would be 0.0 to 5.0 so that if the Prime Rate were 8.25% and the margin were 2.0 (typical for an "average" borrower), the interest rate would be 10.25% (8.25 + 2.0). (See definition of "index" above.)
Mortgage. A lien against real property given by a borrower to a lender as security for money borrowed.
Mortgagee. The entity to whom the mortgage is given; i.e., the lender.
Mortgage Insurance Premium (MIP). The payment made by a borrower of FHA insured mortgages to provide a reserve that protects lenders against losses from very high loan-to-value loans.
Mortgage Loan. A loan which is secured by a mortgage lien filed against real property.
Mortgage (Open-End). A mortgage that allows additional money to be borrowed (up to the original loan amount) without refinancing the loan or paying additional financing charges .
Mortgagor. The entity who gives the mortgage; i.e., the borrower.
Net Operating Income (NOI). From income producing property, the gross income minus the total of all expenses except for debt service. Cash flow is defined as NOI minus the total of all debt service payments.
No Income Verification Loan (NIV). A type of loan generally limited to the self-employed that is underwritten based on the borrower’s written representation of their annual income as stated on the loan application. No tax returns, operating statements or other verification of the income is required. Debt ratios are computed based on the stated income. The primary intent of these programs is to allow owners of small businesses to use their actual cash flows rather than the net incomes normally reported in tax filings. Higher interest rates on these products compensate lenders for their higher risks. (See definition of "debt ratio" above.)
Non-conforming Loan. A loan not meeting the underwriting requirements of Fannie Mae and Freddie Mac. I.e., the vast majority of loans.
Note. A written promise to repay a certain sum of money on specified terms.
Note Broker. An individual who acts as an intermediary between a holder of an existing note and a prospective purchaser of the note.
Originator. An individual who works with a borrower to start a loan. Usually an employee of a financial institution, an employee of a broker or an independent contractor affiliated with several brokers, the originator determines the type of loan a borrower probably qualifies for, helps complete an accurate application, gathers documents necessary to get an approval and acts as an intermediary between the borrower and the underwriter.
Origination Fee. A fee paid to either a broker or a lender for originating a loan. It may be the only compensation for their work in arranging and/or processing the loan or it may be only a portion of the compensation. Not every loan has an origination fee.
PITI. The shorthand way of stating the most usual elements of a residential mortgage payment which may consist not only of the Principal and Interest (PI) but the property taxes (T) and hazard insurance (I) as well. In the case where all four elements are part of the payment, the lender escrows the T and I and pays them on behalf of the borrower when they come due. Some loans are written such that the payment to the lender consists only of the P and I in which case the borrower pays the taxes and insurance directly.
Portfolio Loan. A non- conforming loan that is held by the original lender rather than being sold on the secondary market.
Prepayment Penalty. A fee charged for paying off a loan within a relatively short period of time after the loan has closed. This provision is currently found only in non-conforming products. The time period during which it applies is usually one to three years and the amount of the penalty is usually 1.0% - 3.0% of the original loan amount though other, more complicated formulas are sometimes used. These provisions are sometimes regulated by state law. If a $50,000, 15 year loan were paid off in six months on a loan that had a 1.0% prepayment penalty, the penalty would be $500 ($50,000 x 0.01).
Principal. The amount being borrowed.
Private Mortgage Insurance (PMI). The insurance premium paid by a borrower to protect lenders against losses from loans with loan-to-value ratios higher than 80%. (See definition of "loan-to-value" above.)
Purchase Money Mortgage. A mortgage which secures a note written on a loan used in the purchase of real estate.
Purchase Subject to Mortgage. A purchase in which a buyer agrees to make the monthly mortgage payments on an existing mortgage and in which the original borrower remains liable if the purchaser fails to make the payments as agreed at the time the loan was originally closed.
Rescission Period. A federally mandated period of three business days (beginning on the day after a loan closes) during which the borrower may cancel the new loan. This waiting period only applies to loans which are to be secured by a mortgage on a personal residence for which the borrower is in title at the time of loan origination. This right to cancel does not apply to loans used for the purchase of property. Funds from these loans can only be disbursed after the rescission period.
Refinance. The process of a borrower paying off one loan with the proceeds from another.
Seasoned Loan. A loan which has been in force for a period of time and, therefore, has the borrower’s payment history associated with it. For most purposes, loans are deemed to be "seasoned" after either six months or one year.
Second Mortgage. That mortgage which is recorded after one other mortgage has already been recorded (and has not yet been released). When the first mortgage is paid off and released, the second mortgage becomes the first mortgage.
Statement of Net Worth. A document which contains in an organized fashion all of the financial assets and liabilities of an individual or other entity.
Subordination. An agreement to let an inferior lien (one filed later in time) take precedence (be considered as if it were in a superior position). It is not an uncommon for a lender considering a loan request for a large mortgage (particularly one that will refinance a first mortgage) to require that a second mortgage already in place remain, in effect, in second position through the use of a subordination agreement.
Teaser Rate. An interest rate lower than true stated interest rate of the loan which is in effect for the first few months of a loan. It is used as an inducement to attract borrowers.
Term. The length of time for which money can be borrowed.
Underwriting. The act of applying formal guidelines that provide qualitative and quantitative standards for determining whether or not a loan should be approved.
Yield. Return on investment (the rate at which an investment pays interest and/or dividends).
Adjustable Rate Mortgage: A 2-dimensional measure of land equaling 160 square rods, 10 square chains, 4,840 square yards, or 43,560 square feet.
Adjustment Interval: The period of time between changes in the interest rate for an adjustable-rate mortgage. Typical adjustment intervals are 6 months and 1 year.
Amenities: Noted in the appraisal, the non-monetary benefits derived from property ownership.
Amortization Period: The period, or length of time, over which the principal portion of a mortgage loan is scheduled to be paid down through periodic payments.
Appraisal: An estimate of the value of a property made by a qualified professional called an appraiser. (Impero Commercial Lending typically requires the appraiser to be MAI certified.)
Assumability: A mortgage loan which can be transferred to another person without a change in the terms of the loan. This typically requires a flat-fee to be paid to the lien-holder for transferring.
Balloon Payment: One large payment of the remaining principal balance of a mortgage, due at a time specified in the contract (i.e. a 5-year balloon would have periodic payments made through 5 years and then a lump-sum payment made on the 60th month.)
Basis Point: 1/100th of 1% usually expressed as a margin over an index rate.
Borrowing Entity Type: The legal form under which property is owned.
Bridge/Short-Term Loan: A short-term or interim loan for borrowers who need more time to find permanent-financing or are repositioning a commercial property.
Call: (see Balloon Payment) Essentially the lien-holder has a call provision noted in the contract in which they can call the note due in full. Typically this is a 5-year or a 10-year call.
Capital Expenditures: Line items on a Profit and Loss statement that would not be expensed on an annual basis. This category would include replacement of major building systems, such as roofs, etc.
Carve Out: The definition used for the inclusion of recourse in loan documents for fraud and misrepresentation.
Cash-Out Refinancing: When the principal amount of a new mortgage involved in refinancing is greater than the principal amount outstanding on the existing mortgage being refinanced, and all or a portion of the equity is converted to cash.
Commercial Mortgage-Backed Security (CMBS): A bond or other financial obligation secured by a pool of mortgage loans.
Cost of Funds Indexl (COFI): Index used to determine interest rate changes for adjustable rate mortgages. It is based on the cost of funds of the 11th District of the Federal Home Loan Bank.
Conduit: The financial intermediary that sponsors the link between the lender(s) originating loans and the ultimate investor. The conduit makes or purchases loans from third-party correspondents under standardized terms, underwriting and documents and then, when sufficient volume has been obtained, pools the loans for sale to investors in the CMBS market.
Constant Maturity Treasury (CMT): An index based on the U.S. Treasury that is used in the pricing of debt for banks.
Construction Type: The type of construction used for a commercial building (i.e. concrete tilt-up, etc.).
Debt Service: The periodic payments (principal and interest) made on a loan.
Debt Service Coverage Ratio (or Debt Coverage Ratio): Measures a mortgaged-propertys ability to cover monthly payments defined as the ratio of net operating income over the periodic payments (principal and interest) made on a loan. A DSCR of less than 1.0 means that there is insufficient cash flow generated by the property to cover required debt payments. Typically a lender requires a DSCR of 1.25 or better depending on the property type.
Defeasance: A clause in a mortgage that gives the borrower the right to prepay a commercial mortgage by purchasing US Treasuries in an escrow account to pay off ongoing debt service.
Discount Rate: The rate of interest that the Federal Reserve charges member banks for loans.
Environmental Report: Report generated by qualified environmental firms to determine potential environmental hazards in a building’s region or within the building itself. These reports are typically called a "Phase I", "Phase II", etc and subsequent reports are only required if the preceding report expresses any concerns as to the suitability of the property.
Environmental Risk: Risk of loss of collateral value and of lender liability due to the presence of hazardous materials, such as asbestos, PCB’s, radon or leaking underground storage tanks on a property.
Federal Funds (Fed Funds): Fed Funds is the interest rate charged by those banks with excess reserves on hand (reserves over and above the minimum required by the Federal Reserve) to those banks in need of overnight loans to meet reserve requirements. Since it is set daily, the Federal Funds rate is the most sensitive indicator of the direction of interest rates.
Fixed-Rate Mortgage: A mortgage with an interest rate that remains constant for the life of the loan.
Interest: The sum paid for borrowing money, which pays the lender’s costs of doing business.
Interest Rate: The sum charged for borrowing money, expressed as a percentage
Interest Rate Cap: Limits the interest rate or the interest rate adjustment to a specified maximum. This protects the borrower from increasing interest rates.
Libor: The rate that the most creditworthy international banks dealing in Eurodollars charge each other for large loans. Rates are quoted in monthly increments out to 1 year.
Loan Processing Fee: The fee charged by a lender to prepare all the documents associated with your mortgage.
Loan-to-Value Ratio (LTV) : The ratio between the principal amount of the mortgage balance, at origination or thereafter, to the current value of the underlying real estate collateral. The ratio is commonly expressed to a potential borrower as the percentage of value a lending institution is willing to finance. The ratio is dynamic and varies by lending institution, property type, geographic location, property size, etc.
Lock-Out Period: A period of time after loan origination during which a borrower cannot prepay the mortgage loan without paying the interest the loan would have incurred during the lock-out period.
Margin: The amount that is added to an index rate to determine the total interest rate.
MAT: Monthly Average Treasury.
Maturity: 1. The termination period of a note (e.g., a 25year mortgage has a maturity of 25 years). 2. In sales law, the date a note becomes due.
Mezzanine/Second Loan: A loan secured by a mortgage or trust deed in which the lien is junior, or secondary, to another mortgage or trust deed.
Money Market: The market for short-term debt instruments.
Multi-Family Property Class A: Properties are above-average in terms of design, construction and finish; command the highest rental rates; have a superior location, in terms of desirability and/or accessibility; generally are professionally-managed by national or large regional management companies.
Multi-Family Property Class B: Properties frequently do not possess design and finish reflective of current standards and preferences; construction is adequate; command average rental rates; generally are well-maintained by national or regional management companies; unit sizes are usually larger than current standards.
Multi-Family Property Class C: Properties provide functional housing; exhibit some level of deferred maintenance; command below-average rental rates; usually located in less desirable areas; generally managed by smaller, local property-management companies; tenants provide a less-stable income stream to property owners than Class A and B tenants.
Non-Recourse: A mortgage or deed of trust securing a note without recourse allowing the lender to look only to the security (property) for repayment in the event of default, and not personally to the borrower. A loan not allowing for a deficiency judgment. The lenders only recourse in the event of default is the security (property), and the borrower is not personally liable.
Notice of Default (NOD): To initiate a non-judicial foreclosure proceeding involving a public sale of the real property securing the deed of trust. The trustee under the deed of trust records a Notice of Default and Election to Sell ("NOD") the real property collateral in the public records.
Organization: Securing a completed mortgage application from a commercial (or residential) borrower.
Phase 1 Report: (see environmental report) An assessment and report prepared by a professional environmental consultant who reviews the property - both land and improvements - to ascertain the presence or potential presence of environmental hazards at the property such as underground water contamination, PCB’s, abandoned disposal of paints and other chemicals, asbestos and a wide range of other potentially damaging materials. This Environmental Site Assessment (ESA) provides a review and makes a recommendation as to whether further investigation is warranted (a Phase II Environmental Site Assessment). This latter report would confirm or disavow the presence of an environmental hazard and, should one be found, will recommend additional review and/or mitigation efforts that should be undertaken.
Points (Loan Discount Points): Each point is equal to 1% of the total amount of a mortgage. Typically charged in connection with originating or funding a loan.
Prepayment Penalty: Fees paid by borrowers for the privilege of retiring a loan early.
Prime Rate: The rate at which banks lend to their most creditworthy customers.
Principal: 1. The amount of debt, not including interest, left on a loan. 2. The face amount of the mortgage.
Rate Index: An index used to adjust the interest rate of an adjustable mortgage loan (e.g., the change in U.S. Treasury securities (T-Bills) with 1-year maturity. The weekly average yield on said securities, adjusted to a constant maturity of 1 year, which is the result of weekly sales, may be obtained weekly from the Federal Reserve Statistical Release H.15 (519). This change in interest rates is the "index" for the change in a specific Adjustable Mortgage Loan.
Recourse: Personal liability.
Rent Roll: A list of tenants leasing a property, which details terms of lease, area leased, and the amount of rent being paid.
Replacement Reserves: An amount set aside from net operating income to pay for the eventual wearing out of short-lived assets. Monthly deposits that a lender may require a borrower to reserve in an account, along with principal and interest payments for future capital improvements of major building systems; (i.e., HVAC, parking lot, carpets, roof, etc.)
Reserve Funds: In CMBS, portion of the bond proceeds that are retained to cover losses on the mortgage pool. A form of credit enhancement (also referred to as "reserve accounts").
Second Mortgage: A mortgage that is second in priority because of the time of recording the mortgage or of the subordination of the mortgage.
Secondary Mortgage Market: The buying and selling of first mortgages or trust deeds by banks, insurance companies, government agencies, and other mortgagees. This enables lenders to keep an adequate supply of money for new loans. The mortgages may be sold at full value ("par") or above, but are usually sold at a discount. Not to be confused with a "second mortgage."
Self-Amortizing Mortgage: One that will retire itself through regular principal and interest payments. Contrast with balloon mortgage or interest-only loan.
Spread: Number of basis points over a base rate index.
Tax & Insurance Impound: Monthly deposits that a lender may require to be included with principal and interest payments for the payment of taxes and insurance.
Term: The length of time a mortgage rate is fixed or adjustable prior to it coming due. Different from loan amortization.
Third Party Costs: Costs resulting from third-party reports such as appraisal reports, environmental reports or structural engineering reports.
Title Insurance: An insurance policy that insures you against errors in the title search - essentially guaranteeing your, and your lender’s, financial interest in the property.
U.S. Treasury Bill: Treasury Bills, or T-Bills, are short-term securities with maturities of up to one year. They are issued by the U.S. Government at a discount from face value. The price is quoted in yield, not dollars. At maturity, T-Bills are redeemed for full face value. T-bills are issued in three-month, six-month and 1-year maturities and are backed by the full faith and credit of the U.S. Government.
U.S. Treasury Bond: Treasury Bonds are long-term securities with maturities greater than 10 years. Treasury bonds are coupon-bearing securities that pay interest on a semi-annual basis. Treasury bonds are backed by the full faith and credit of the U.S. Government.
U.S. Treasury Note: Treasury Notes are intermediate-term securities issued with 2, 3, 5, and 10-year maturities. Treasury notes are coupon-bearing securities that pay interest on a semi-annual basis. Treasury notes are backed by the full faith and credit of the U.S. Government.
Underwriting: The process of deciding whether to make a loan based on property cash flow, credit, and/or other factors.
Yield: The rate of return on a security, taking into consideration annual interest payments, purchase price, redemption value, and the time remaining until maturity.
Yield Maintenance: A prepayment premium that allows investors to attain the same yield as if the borrower made all scheduled mortgage payments until maturity. Yield maintenance premiums are designed to make investors indifferent to prepayments and to make refinancing unattractive and uneconomical to borrowers.
Adjustable Rate Mortgage
Mortgage where the interest rate adjusts periodically up or down through a set index. Also called a floating rate mortgage.
Adjusted Gross Income
Gross income of a building if fully rented, less an allowance for estimated vacancies.
The period of time between changes in the interest rate for an adjustable-rate mortgage. Typical adjustment intervals are one year, three and five years.
The process of paying the principal and interest on a loan through regularly scheduled installments.
Annual Percentage Rate (APR)
This is the actual rate of interest your loan would be if you included all of the other associated costs such as closing costs and points.
Extensive remodeling of an older apartment building.
An estimate of the value of a property, make by a qualified professional called an appraiser.
See Adjustable Rate Mortgage.
Loans that can be transferred to a new owner if a home is sold.
Balloon (Payment) Mortgage
Usually a short-term fixed-rate loan which involves small payments for a certain period of time and one large payment for the remaining principal balance, due at a time specified in the contract.
Basis Points (BP)
1/100th of 1% expressed as margin over index rate.
the process of paying additional points on the loan to reduce the monthly mortgage. There are typically two specific types
Financing which expected to be paid back relatively quickly, such as by a subsequent longer - term loan. Also called a swing loan.
The maximum which an adjustable-rate mortgage may increase, regardless of index changes. An interest rate cap limits the amount the interest can change, while a payment cap limits the increase in monthly payment to a specific dollar amount.
A net yield set by an investor to determine the value of an income producing property.
Line items on a profit and loss statement that would not be expensed on an annual basis. This category would include replacement of major building systems, such as roofs, driveways, etc.
A method used to estimate the value of a property based on the rate of return on investment.
The meeting between the buyer, seller and lender (or their agents) where the property and funds legally change hands. Also referred to as "settlement".
The cost and fees associated with the official change in ownership of the property and with obtaining the mortgage, that are assessed at the closing or settlement.
Direct link to an institutional lending source.
Comparative Market Analysis
An estimate of the value of a property based on an analysis of sales of properties with similar characteristics.
The financial intermediary that sponsors the conduit between the lender(s) originating loans and he ultimate investor. The conduit makes or purchases loans from third party correspondents under standardized terms, underwriting and documents and then, when sufficient volume has been obtained, pools the loans for sale to investors in the CBMS markets.
a short term loan to pay for the construction of commercial buildings. These loans typically provide periodic disbursements to the builder as each stage of the building is completed. When construction is completed a take-out or permanent loan is used to pay off the construction loan.
An option available on some adjustable rate mortgages (ARM’s) that allows the loan to be converted to fixed rate mortgage. Conversion usually involves paying a one-time fee and conversion may be limited to within a certain time - frame.
Someone who is willing to sign mortgage loan obligation with you in case you default on your monthly payments. Normally, the cosigner is required to go through the same application and approval process as the original signer of the loan.
A lending organization that obtains it source of funds from the commercial market.
A loan to provide improvements to the property.
A search through your existing credit history by a qualified credit bureau to determine if, and the number of times, you may have been delinquent making monthly payments on previous debts. Even when a credit report is for the most part positive, many lenders require written explanation for any negative comments within the credit report. This type of report is usually required to obtain a mortgage loan.
Debt Service Coverage Ratio (DSC)
A 1.0 means breakeven. The ratio is calculated by taking the net operating income and dividing it by the mortgage payments. Most lenders look for a ratio of 1.25 or higher.
The periodic payments (principal and interest) made on a loan.
One of several financial calculations performed by your lender to determine if you can afford a particular monthly payment. The debt ratio (also known as the obligations ratio) is the sum of all your monthly debt payments including your total monthly mortgage payment divided by your total monthly income. Typically acceptable debt ratios for Conventional Loan are 36 - 38%, FHA Loans are 41 - 43%, and VA Loans Are 41%.
Many lenders may offer you a lower "teaser" rate on an adjustable rate mortgage for the first adjustment period. After this period is over, the lender will adjust your loan according to the normal lenders margin rate.
Down - Payment
The amount of money you put down, normally anywhere from 15% - 35%.
The legal definition
Effective Gross Income
gross income of a building if fully rented, less an allowance for estimated vacancies
Report generated by an architect or engineer describing the current physical condition of the property and its major building systems, i.e., HVAC, parking lot, roof, etc. The report also determines an amount for calculating replacement reserves, if needed.
Report generated by an qualified environmental firm to determine potential environmental hazards in a building’s region or within the building itself.
Risk of loss of collateral value and of lender liability due to the presence of hazardous materials, such as asbestos, PCB’s, radon or leaking underground storage tanks (LUSTS) on a property.
1.The difference between the fair market value and current indebtedness, also referred to as "owner’s interest". 2. The difference between the amount owed on the loan and the current purchase price of the home or property
Capital raised from owners. In a commercial real estate case, a lender will also provide equity capital for a percentage of ownership.
1. A special account set up by the lender in which money is held to pay for taxes and insurance. 2. A third party who carries out the instructions of both the buyer and seller to handle the paperwork at the settlement.
Fair Market Value
An appraisal term for the price which a property would bring in a competitive market, given a willing seller and willing buyer, each having a reasonable knowledge of all pertinent facts, with neither being under any compulsion to buy and sell.
A congressionally chartered corporation which buys mortgages on the secondary market from Banks, Savings & Loans, Etc; pools them and sells them as mortgage-backed securities to investors on the open market. Monthly principal and interest payments are guaranteed by FNMA but not by the U.S. Government.
Federal Housing Administration, a government agency.
Fixed Rate Mortgage
A mortgage with an interest rate that remains constant for the life of the loan. The most common fixed-rate mortgage is repaid over a period of 30 years; 15-year fixed-rate mortgage are also available.
Floating Rate Mortgage
See Adjustable Rate Mortgage.
Floor - To - Area Ratio (FAR)
The relationship between the total amount of floor space in a multi - story building and the base of that building. FAR’s are dictated by zoning laws and vary from one neighborhood to another, in effect stipulating the maximum number of stories a building may have.
The process by which a lender takes back a property on which the mortgagee had defaulted. A servicer may take over a property from a borrower on behalf of a lender. A property usually goes in to the process of foreclosure if payments are no more than 90 days past due.
A written promise from a lender to provide a loan at a future time.
Freddie Mac (Federal Home Loan Mortgage Corporation)
Entity buys loans from conventional lenders and packages them for sale to investors as securities.
a building which contains only one retail business. Fast-food franchises and retail stores are often freestanding buildings.
One of two loan types called FHA or VA loan. These loans are partially backed by the government and can help veterans and low-to-moderate income families afford homes. The advantages of these types of loans in that they often have a lower interest rate, are easier to qualify for, have lower down-payment requirements, and can be assumed by someone else if the home is sold. Many mortgage bankers can obtain these type of loans for you.
Graduated Payment Mortgages
A type of mortgage where the monthly payments start low but increases by a fixed amount each year for the first five years. The payment shortfall or negative amortization is added to the principal balance due on the loan. The advantages if this type of loan is a lower monthly payment at the beginning of the loan term. This disadvantages are typically a slightly higher rate than traditional fixed rate mortgage loan and lenders usually require a larger down payment. In addition, the negative amortized amount increases the balance due on the total loan which can be a problem if the value of the home declines.
Total income, before deducting taxes and expenses. The scheduled (total) income, either actual or estimated, derived from a business or property.
Growing Equity Mortgage
A type of mortgage where the monthly payments start low but increase by a fixed amount each year for the entire life of the loan as compared to five years with a Graduate Payment Mortgage. The advantage of this type of loan is that the loan can usually be paid off in a short duration than a traditional fixed rate loan. This disadvantage of this loan is that the payment continues to go up irrelevant of the income of the borrower.
High interest rate financing.
Housing and Urban Development, a federal government agency.
An economic indicator, usually a published interest rate, that determines changes in the interest rate of an adjustable - rate mortgage. ARM rates are adjusted to reflect changes in the index. The margin is the amount a lender adds to the index to establish the actual interest rate on an ARM.
The sum paid for borrowing money, which pays the lender’s costs of doing business.
The sum charged for borrowing money, expressed as a percentage.
Interest Rate Cap
Limits the interest rate or the interest rate adjustment to a specified maximum. This protects the borrower from increasing rates.
the aggregate amount of interest payments from borrowers that is less than the accrued interest on the certificate.
An individual or institution which, acts as an underwriter or agent for corporations and municipalities issuing securities, but which does not accept deposits or make loans. Most also maintain broker/dealer operations, maintain markets for previously issued securities, and offer advisory services to investors also called investment banker. See also bank, commercial bank, and originator, syndicate.
an agreement by two or more individuals or entities to engage in a single project or undertaking. Joint ventures are used in real estate development as a means of raising capital and spreading risk. For all practical purposes a joint venture is similar to a general partnership. However, once the purpose of the joint venture has been accomplished, the entity ceases to exist.
An agreement between the commercial property owner and the lender that assigns lease payments directly to the lender.
The cost of improvements for a leased property. Often paid by the tenant.
This is simply the profit the lender expects to receive from the loan. You can ask your lender what the margin is on an adjustable rate mortgage. Typically, lenders use a discount rate initially as a "teaser" rate. You must be sure to get the normal margin after the discount period is over.
Lines of Credit
An arrangement in which a bank or vendor extends a specified amount of unsecured credit to a specified borrower for a specified time period.
Loan origination Fee
The fee charged by a lender, to prepare all the documents associated with your mortgage.
Loan Processing Fee
the fee charged by a lender, to prepare all the documents associated with your mortgage.
the ratio between the principal amount of the mortgage balance, at origination or thereafter, to the current value of the underlying real estate collateral. The ratio is commonly expressed to a potential borrower as the percentage of value a lending institution is willing to finance. The ratio is dynamic, and varies by lending institution, property type, geographic location, property size, etc.
Lock - In
The process of fixing the interest rate for a specific period of time irrelevant of future or impending economical changes to the interest rate. This process may require a fee or premium as it reduces your risk that the monthly payments will change while the loan paperwork is filed.
Lock - Out Period
A period of time after loan origination during which a borrower cannot prepay the mortgage loan without paying the full amount of interest due for the prescribed time period.
London Interbank Offered Rate (LIBOR)
The short - term rate (1year or less) at which banks will lend to each other in London. Commonly used as a benchmark for adjustable - rate financing.
See Loan to Value Ratio.
The amount that is added to an index rate to determine the total interest rate.
1. The termination period of a note (e.g., a 30 - year mortgage has maturity of 30 years.) 2. In sales law, the date a note becomes due.
Late-stage capital financing.
An entity that makes loans with its own money and then sells the loan to other lenders.
An entity that arranges loans for borrowers.
A type of insurance changed by most lenders to offset the risk of your loan when your down payment is less than 20% of the value of the home.
Multi - Family Property Class A
Properties are above average in terms of design, construction and finish; command the highest rental rates; have a superior location, in terms of desirability and / or accessibility; generally are professionally managed by national or large regional management companies.
Multi - Family Property Class B
Properties frequently do not possess design and finish reflective of current standards and preferences; construction is adequate; command average rental rates; generally are well maintained by national or regional management companies; unit sizes are usually larger than current standards.
Multi - Family Property Class C
Properties provide functional housing; exhibit some level of deferred maintenance; command below average rental rates; usually located in less desirable areas; generally managed by smaller, local property management companies; tenants provide a less stable income stream to property owners than Class A and B tenants.
Occurs when interest accrued during a payment period is greater that the scheduled payment and the excess amount is added to the outstanding loan balance (e.g., if the interest rate on ARM exceeds the interest rate cap, then the borrower’s payment will be sufficient to cover the interest accrued during the billing period - the unpaid interest is then added to the outstanding loan balance).
Net Effective Rent
Rental rate adjusted for lease concessions.
Net Operating Income (NOI)
Total income less operating expenses, adjustments, etc., but before mortgage payments, tenant improvements and leasing commissions.
Net - Net Lease (NN)
Usually requires the tenant to pay for property taxes and insurance in addition to the rent.
Notice of Default (NOD)
To initiate a non - judicial foreclosure proceeding involving a public sale of the real property securing the deed of trust. The trustee under the deed of trust records a Notice of Default and Election to Sell ("NOD") the real property collateral in the public records.
Non - Recourse
A finance term. A mortgage or deed of trust securing a note without recourse allows the lender to look only to the security (property) for repayment in the event of default, and not personally to the borrower. A loan not allowing for a deficiency judgment. The lender’s only recourse in the event of default is the security (property) and the borrower is not personally liable.
Periodic expenses necessary to the operation and maintenance of an enterprise (e.g., taxes, salaries, insurance, maintenance). Often used as a basis for rent increases.
A type of mortgage where the lender receives a percentage of the gross revenue in addition to the mortgage payments.
Commonly used for large retail stores. Rent payments include a minimum or "base rent" plus a percentage of the gross sales "overage." Percentages generally vary from 1% to 6% of the gross sales depending on the type of store and sales volume.
An assessment and report prepared by a professional environmental consultant who reviews the property - both land and improvements - to ascertain the presence or potential presence of environmental hazards at the property, such as underground water contamination, PCB’s, abandoned disposal of paints and other chemicals, asbestos and a wide range of other potentially damaging materials. This Environmental Site Assessment (ESA) provides a review and makes a recommendation as to whether further investigation is warranted (a Phase II Environmental Site Assessment). This latter report would confirm or disavow the presence of an mitigation efforts that should be undertaken.
Principal, interest, taxes and insurance. Your calculated estimated of monthly payments.
Loan fees paid by the borrower. One point is 1% of the loan amount.
fees paid by borrowers for the privilege of retiring a loan early.
Pre - qualification
The process of determining the amount of money a particular lender will let you borrow. You should strive to obtain pre-qualification with at least two or three lenders.
An artificial rate set by commercial bankers. Many banks will use the Wall Street Prime rate. This is a rate set by the top lending banks in the country.
1. The amount of debt, not including interest, left on a loan. 2. The face amount of the mortgage.
A report showing exactly how much the particular home
Most lenders will classify a property by its age and needed maintenance. As an example many insurance companies will only loan on properties that are class A, meaning that the properties age is 10 years old or less and is not in need of repair.
Taxes based on the market value of a property. Property taxes vary from state to state.
An index used to adjust the interest rate of an adjustable mortgage loan (e.g., the changes in U.S. Treasury securities (T-bill) with 1-year maturity. The weekly average yield on said securities, adjustable to a constant maturity of 1 year, which is the result of weekly sales, may be obtain weekly from the Federal Reserve Statistical Release H.15 (519). This changes in interest rates is the "index" for the change in a specific Adjustable Mortgage Loan).
A loan for which the borrower is personally liable for payment is the borrower defaults.
REIT (Real Estate Investment Trust)
Pooled funds that purchase and hold commercial real estate.
The renewal of an existing loan by the some borrower.
Rent Step - Up
A lease agreement in which the rent increases every period for a fixed amount of time or for the life of the lease.
Monthly deposits that a lender may require a borrower to a reserve in an account, along with principal and interest payments for future capital improvements of major building systems; i.e., HVAC, parking lot, carpets, roof, etc.
A portion of the proceeds that are retained to cover losses on the mortgage pool. A form of credit enhancement (also referred to as "reserve accounts").
The amount of money left over after you have paid all of your ordinary and necessary debts including the mortgage. This calculation is typically used with VA loans.
Sale / Lease Back
When a lenders buys a property and leases it back to the seller for an extended period of time.
Savings & Loans
A federally or state charted financial institution that takes deposits from individuals, funds mortgages, and pays dividends.
Small Business Administration, a federal government agency.
A mortgage on real estate, which has already been pledged as collateral for an earlier mortgage. The second mortgage carries rights, which are subordinate to those of the first.
A loan secured by a mortgage or trust deed, in which the lien is junior, or secondary, to another mortgage or trust deed.
Secondary Mortgage Market
The buying and selling of first mortgages or trust deeds by banks, insurance companies, government agencies, and other mortgagees. This enables lenders to keep an adequate supply of money for new loans. The mortgages may be sold at full value ("par") or above, but are usually sold at a discount. The secondary mortgage market should not be confused with a "second mortgage."
ownership of a business, with no formal entity as a vehicle or structure.
Number of basis points over a base rate index.
A formal offer by a lender making explicit the terms under which it agrees to lend money to a borrower over a certain period of time.
(see Engineering Report)
Tax & Insurance Impound
Monthly deposits that a lender may require to be included with principal and interest payments for the payment of taxes and insurance.
Tenant Improvements (TI)
The expense to physically improve the property to attract new tenants to new or vacated space which may include new improvements or remodeling. May be paid by tenant, landlord, or both. Typically, tenants are provided with a market rate TI allowance ($/sq. ft.) that the owner will contribute towards improvements. The tenant must pay for amounts above the TI allowance desired by the tenant.
The length of a mortgage.
Third Party Costs
costs resulting from third party reports, whether it be appraisal reports, environmental reports or structural engineering reports.
The actual legal document conferring ownership of a piece of real estate.
An insurance policy which insures you against errors in the title search - essentially guaranteeing your and your lender’s, financial interest in the property.
Triple - Net Lease
A lease that requires the tenant to pay for property taxes, insurance and maintenance in addition to the rent (also referred to as " Net Net Net Lease").
The process of deciding whether to make a loan based on credit, employment, assets and / or other factors.
Uniform Residential Loan Application (1003)
This application, also called a URL - 1003 is the standard loan application used by all lenders.
The underwriter is the lender or company who actually provides the money for you loan. A mortgage broker "brokers" and represents several different underwriters and depending on your situation they choose the "best" underwriter for you and your lender.
Generally refer to fees charges to pay for third party costs like appraisals.
Attempts to resolve a problematic situation, such as a bad loan.
A prepayment premium that allows investors to attain the same yield as if the borrower made all scheduled mortgage payments until maturity. Yield maintenance premiums are designed to make investors indifferent to prepayments and to make refinancing unattractive and uneconomical to borrowers.
Yield To Average Life
Yield calculation used, in lieu of "Yield to Maturity" or "Yield to Call," where books are retired systematically during the life of the issue, as in the case of a "Sinking Fund," with contractual requirements. Because the issuer will buy its own bonds on the open market to satisfy its sinking fund requirement if the bonds are trading below Par, there is, to that extent, automatic price support for such bonds; they therefore tend to trade on a yield - to - average - life basis.
Yield To Maturity (YTM)Concepts used to determine the rate of return an investor will receive if a long - term, interest - bearing investment, such as a bond, is held to its maturity date. It takes into account purchase price, redemption value, time to maturity, coupon yield and the time between interest payments. Recognizing time value of money, it is the discount tare at which the present value of all future payments would equal the present price of the bond (also referred to as "internal rate of return"). It is implicitly assumed that coupons are reinvested at the YTM rate. YTM cam be approximated using a bond value table (also referred as a "bond yield table") or can be determined using a programmable calculator equipped for bond mathematics calculations.