ADJUSTABLE-RATE MORTGAGES (ARMS) - An adjustable-rate mortgage (ARM) is generally originated at one rate of interest. For instance, if you use a 5 year arm, then you will pay a fixed rate interest for the first 5 years, then the interest rate will change to an adjustable-rate mortgage. That adjustable rate then fluctuates up or down during the loan term based on some objective economic
indicator. Because the interest rates on ARM’s change, the ARM’s interest rate is tied to the movement of an objective economic indicator called an index. Most indexes are tied to U.S. Treasury securities. Details of how and when the interest rate will change are included in the note.

THE FEDERAL RESERVE SYSTEM - The role of the Federal Reserve System (the Fed) is to maintain sound credit conditions, help counteract inflationary and deflationary trends and create a favorable economic climate. The Federal Reserve System divides the country into 12 federal reserve districts, each served by a federal reserve bank. All nationally chartered banks must join the Fed and purchase stock in its district reserve banks. The Federal Reserve regulates the flow of money and interest rates in the marketplace indirectly through its member banks by controlling their reserve requirements and discount rates. The Fed reserve requires that each member bank keep a certain amount of assets on hand as reserve funds. These reserves are unavailable for loans or any other use.

Loan fees - When the buyer secures a new loan to finance the purchase of a new home, the lender ordinarily charges a loan origination fee of 1 to 2 percent of the loan. The fee is usually paid by the purchaser at the time the transaction closes. The lender may also charge discount points. If the buyer assumes the seller’s existing financing, the buyer may pay an assumption fee. Also, under the terms of some mortgage loans, the seller may be required to pay a prepayment charge or penalty for paying off the mortgage loan before it’s due date.

Tax reserves and insurance reserves (escrow or impound accounts) - Most mortgage lenders require that borrowers provide reserve funds or escrow accounts to pay future real estate taxes and insurance premiums. A borrower starts the account at closing by depositing funds to cover at least the amount of unpaid real estate taxes (The buyer receives a credit from the seller at closing for any unpaid taxes.) Afterward, an amount equal to one month’s portion of the estimated taxes is included in the borrower’s monthly mortgage payment. The borrower is responsible for maintaining adequate fire or hazard insurance as a condition of the mortgage loan.

Appraisal fees - Either the seller or the purchaser pays the appraisal fees, depending on who orders the appraisal. When the buyer obtains a mortgage, it is customary for the lender to require an appraisal. In this case, the buyer bears the cost.

Before you buy an investment property it is critical that you create your own projection of the property's profitability. Real-Estate-Proforma.com has a quick-proforma with which you can calculate real estate financial statistics such as Internal Rate of Return, Capitalization Rate, Cash-on-Cash, Debt Multiplier, Loan-to -Value Ratio, Debt Coverage Ratio, and Mortgage Payments. You can use this JavaScript proforma to project the profitability of a real estate project. By becoming a member you will receive access to a number of Excel real estate proformas. membership | services

If you are analyzing another person's proforma, or you are examining a prospectus for a real estate deal, it is very important that you read the document carefully and determine how the values of the financial statistics above are being calculated. For instance, values such as the Cap Rate may be determined from overly optimistic projections of the future rental income of a property.

You can "reverse engineer" the financial projections you receive from a prospectus and/or request the Excel (or other type of) spreadsheet a developer used to create their proforma. A very useful Excel or Visual Basic macro used to check Excel formulas is available in the spreadsheet below for download. Download Mortgage Formula Excel Spreadsheet

The due-diligence you do on a potential investment may uncover a number of potential problems with a real estate deal and we suggest you research each real estate investment very carefully. There are a variety of real estate financial consultants who can help with this, but if you are like many Real-Estate-Proforma.com members, you can or are learning to do your own due-diligence.

We hope you become a more successful real estate investor by using this site! membership | services