A lay person's guide to mortgage terminology and lender jargon
The ratio (expressed a percentage of the periodic principal repayment that is included in each monthly loan payment to the total principal amount borrowed. It is the difference between the mortgage or loan constant and the nominal or stated interest rate on the loan. In the previous example of a $1 million loan, the nominal or stated interest rate is 10%, the loan constant is 10.9044%, and the amortization rate is 0.9044%
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A mathematical process which estimates the market value of a property as a multiple of its annual net income based on a certain rate of return. This estimate of market value can be expressed in formula form as:
Market Value = Annual Net Income (in dollars) + Rate of Return (as a decimal)
Market Value = $ 100,000 / .10 = $1 .000,000
CAPITALIZATION RATE (or Cap Rate) The rate of return that a property's net income generated on its owner's investment in that property (10% in the above example).
DEBT SERVICE The amount of money that a borrower must pay every month in order to meet the requirements of the original requirements and repay the amount borrowed. It usually includes interest, principal and escrow amounts for real estate taxes and hazard insurance.
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