Definition of Accrued Interest
Saturday, April 23, 2011
Accrued Interest: The amount of interest earned on a note, but not yet received in payment. An example would be a straight note (no payments). At the end of the first year the balance owed would be the original principal plus one year’s accrued interest.
Add-On Interest: The interest rate is applied to the loan amount to get yearly interest. This is multiplied by the number of years. This total interest is added on to the loan balance. The monthly payment is calculated by dividing this number (principal plus add-on interest) by the number of payments. This method contrasts with charging interest on the remaining principal balance.
Adjustable Rate Mortgage (ARM): A mortgage or other real estate loan wherein the interest rate and payments that correspond to the interest are adjustable from year to year according to some index such as the rate paid by the government on Treasury Bills.
Algebraic Logic: The calculator logic of putting the operation sign (plus, minus, times or divided by) before the number is entered.
All-Inclusive Deed of Trust: A note secured by deed of trust that “wraps around” a smaller senior loan. The debtor pays the holder of the wrap who in turn pays the included senior lien. See also “Wraparound Mortgage.”
Amendment Of A Note: Changing the interest, payment schedule, or due date on an existing note without without writing a new note.
Amortization: The payments on an amortized loan are established to contain both principal and interest so that the loan will be paid off in full by the end of the amortization period.
Annual Percentage Rate (APR): The true cost of a loan to a borrower as required by the Truth in Lending Laws.
Arrears: 1) Behind in making payments, as in “The payments were 3 months in arrears.” 2) Later than earned, as in “Loan interest is paid in arrears. The interest for May is paid in the June payment.”
Assignee: The person acquiring a note from a previous holder. Assignment: Transfer of the rights of a note from one holder to another. Assignor: The person giving up ownership of a note to a new holder.
Balloon Payment: A large payment on a note, usually due at the end of the payment schedule. There can also be partial balloon payments during the note term.
Beneficiary: The person entitled to receive the payments on a note.
Blended Rate: The overall interest rate when two or more loans are on a property. It is higher than the rate on the lowest rate loan and lower than the rate on the highest interest loan. Also called Overall Rate (OAR).
Boiler Plate: Slang for standardized legal language or template format writing often used in loan forms, real estate closings, and legal contracts.
Buy Down: In order to reduce the interest and payments on a loan for the buyer, the property seller may pay the lender some money up front to “buy down” the interest and payments for a certain period of time. Example: The seller buys down a 30-year loan at 14% interest so that the buyer of the property only pays 11% interest for the first 2 years.
“Carry Paper”: For a property seller to take part or all of the sale price of the property in the form of a secured note. Example: The seller carried $20,000 in paper to facilitate the sale of his property.
Cash Flow Diagram: A graphic representation of a series of cash flows, in or out or both, showing how much and their timing.
Clear: Remove previous instructions and data from the calculator so they will not interfere with the next calculations. You can clear the program, the financial registers, the storage registers, and the display.
Closing: Completion of a transaction, including details like preparation and recording of legal documents, procurement of applicable insurance coverage, and transfer of funds.
Closing Costs: The various fees and charges involved in closing a transaction.
Collateral: Property pledged as security for performance of an obligation.
Collection Service: A neutral third party, other than the borrower or lender. The collection agency or collection service collects the payments due on a note and forwards the proceeds to the proper recipients.
Compounding: The situation where interest accrues and then gathers interest. Example: A $310,000 straight note (no payments) with 12% compound monthly interest earns $91,200 the first year. Adding that to the original principal gives the next year starting balance of $401,200. This sum will earn 12% interest. The process repeats each year.
Compound Interest: See Compounding.
Constant (Loan Constant): The yearly payment on a loan divided by the remaining principal balance. As amortized loans are paid down, the Loan Constant increases.
Contract For Deed: A form of security instrument and debt contract wherein the owner of the property gives the buyer legal title only after the obligation has been paid in full. See Land Contract.
Courthouse: Place where deeds and real estate paper are recorded. See also Recorder’s Office and Registrar of Deeds.
Credit Report: The report on a person’s credit standing issued by a credit information bureau such as Experian. It shows what credit a person has been granted and what their payment record is.
Creditor: The person to whom money is owed.
Current: Payments are current when they are up to date.
Current Principal Balance: The balance currently owed on a note, which may be smaller or larger than the original principal balance.
Commercial & Business Loan Definitions D-F by test author
Dead Equity: Equity in property, not earning interest, not being used to acquire more property.
Debt: An obligation owed by a borrower to a creditor.
Debtor: One who owes money to another.
Debt Service: The monthly payments required to keep the loans on a property current.
Decimal: The period between numbers designating the difference between whole numbers and parts thereof. Example: 1.1, wherein the first 1 is a whole number and the second 1 represents 1/10th. In this case there is one number to the right of the decimal.
Deed of Trust: A security instrument which utilizes a neutral third party called a Trustee to foreclosure in the event of default. This makes it generally faster and easier to foreclose on a Deed of Trust than on a Mortgage.
Default: Violation of the terms and/or conditions of a note and security instrument.
Delinquent: When payments are overdue, they are said to be delinquent.
Delta: A Greek symbol shaped like a triangle, which stands for change between two numbers. Example: Delta % from 100 to 125 is 25% increase.
Discount: A purchase price less than the remaining principal balance of a note.
Discounted Paper: Real estate paper bought or sold at a price less than the principal balance.
Discounting: The practice of adjusting the price of a note to compensate for other factors such as term, payments, interest rate, security, and needs of the seller. The discount raises the yield to the buyer.
Discount Points: A point is one percent of the principal amount.
Double Escrow: Two separate but related escrows or closings, each contingent or dependent on the other. Example: You are buying a note and reselling it immediately for profit. The buy and resale escrows are contingent on each other and close at the exact same time. See Simultaneous Closing.
Effective Interest Rate: The overall yield earned on an investment, taking into account the discount and all existing loan terms.
End Buyer: The person who purchases the real estate note you find.
Enter: Putting a number or other information into the calculator. An entry starts in the display and then is entered into the calculator inner workings for use.
Equity: The amount left over after subtracting the loans from the value of the property.
Equity Cushion: The margin of safety over and above a specific loan on a property. A $100,000 property with $65,000 in loans would have a $35,000 equity cushion to protect the loans.
Escalation: Rising loan payments as time goes on.
Escrow: A neutral third party stakeholder that receives the instruments, contracts, documents and funds in a transaction as needed from both parties. Escrow sees that the terms and conditions of the contract are fulfilled according to the escrow instructions.
Escrow Instructions: Written instructions to an escrow officer, signed by both parties to a transaction. This tells the escrow officer exactly what to do to complete the transaction.
Escrow Officer: The person responsible for administration of the transactions in an escrow office.
Execution: The legal signing of a document. In order to record an instrument, a Notary Public must witness its execution.
Existing Financing: The financing on a property before making any changes. Example: When looking for a property to buy, you arefirst interested in the existing financing. See also Proposed Financing.
Extension Agreement: A written agreement giving a debtor more time to pay on an obligation.
Face Amount: The original principal balance appearing on the face of the note. Be sure to check the current principal balance of a seasoned note because it may be drastically different than the face amount.
Financial Calculator: A calculator designed for dealing in computations involving money, loans, payment and time.
First Loan: (Note, Mortgage, Trust Deed): The first loan to be recorded as a lien against a specific property (first in time and seniority).
Flipping: Slang for referring a note to an investor and making a quick cash profit.
Foreclosure: A judicial foreclosure is the means of enforcing one’s right to payment under a Mortgage. The judge orders the property to be sold at auction and the proceeds used to pay the creditor. A Trust Deed can be foreclosed by having the Trustee auction the property via Trustee’s Sale.
Free and Clear: Property that has no loans on it whatsoever is free and clear.
Fully Amortized: A loan whose payments include both interest and principal and will eventually be paid in full during its terms with no balloon payment.
FV: Future Value. The balloon payment of a loan or the loan balance as of some future date.
Commercial Lending definitions G-L by test author
Green Note: A note that is created in the sale of property for the specific purpose of immediate resale to a prearranged investor. In this case it might be construed to be a direct loan of money from the investor to the property Seller, and therefore subject to usury and truth in lending laws. See also Usury and Truth in Lending.
Hard Money: New money loaned against a property without a change in ownership. Example: A property owner puts a new second loan on the property to get cash. This is a hard money loan. Hard money loans generally involve personal liability in addition to the lien on the property. See also Purchase Money.
Hard Paper: Paper that has good strong terms and commands a good resale value in the paper marketplace. It would sell for a relatively small discount.
Holder: The current owner of a note.
Hypothecation: Pledging assets for a loan. In the case of a real estate loan, the property is pledged or hypothecated as security for the loan. When you borrow against a note you own, you assign the note to the lender as security for the money you are borrowing. The income from the note you assigned pays the payments on the money you borrowed. When the lender is paid in full, the note is assigned back to you.
I: The interest rate or yield on a note.
Imputed Interest: In seller carry-back financing, when the interest is below a certain rate determined by the IRS, the IRS imputes or charges the property seller tax on the highest rate of interest. (See your tax advisor on this).
Imputed Principal: In seller carry-back financing, when the buyer of the property gets an interest rate below a certain rate specified by the IRS, the IRS may impute or declare that the actual property sales price was lower than stated in the purchase contract. (See your tax advisor on this).
Installment: One of a series of payments on a note.
Installment Note: A note that is payable in several individual payments called installments.
Instrument: The legal document used as evidence of debt, title, lien, etc.
Interest: “Rent” paid on a debt. See also Add-On Interest, Compound Interest, and Simple Interest.
Interest Extra: The loan payment terms wherein the payment goes to principal and not to interest.
Interest Included: The loan payment terms wherein the payment goes to interest first and any surplus goes to reducing the principal.
Interest Only: The loan payment terms wherein the payment is exactly equal to the monthly interst, not more and not less.
Internal Rate of Return (IRR): The yield or rate of return, used when working with a series of uneven cash flows; as contrasted to regular uniform payments.
Junior: Recorded at a later date (than the senior loans). The security instrument recorded next after the first loan would be a second. It is junior to the first.
K Factor: The Loan Constant. See Constant.
Land Contract: A security instrument wherein the seller (Vendor) gives the buyer (Vendee) possession of the property, but retains legal title (the deed) as security for a loan until specific payment has been made. The buyer of the property gets “equitable title” and the right to use and enjoy the property and tax benefits prior to actually receiving the deed.
Late Charges: Fees or penalties owed to a lender when payments are late.
Less Than Interest Only: The loan payment terms wherein the payments are less than the monthly interest. This means the total debt grows with time. See Negative Amortization.
Level Payments: The loan payment terms wherein payments stay the same each period, neither increasing nor decreasing with time.
Leverage: Buying property with other People’s Money (OPM). This allows one to acquire much more property by putting as little down payment on each piece as possible. High leverage means low equity.
Liabilities: Debts and obligations owed on.
Lien: An encumbrance or charge recorded against a property. Recorded loans are liens.
Line of Credit: A prearranged loan from a lender wherein when you want the money, all you have to do is write a check. The check is deposited with the lender and becomes a loan at that time. Instant loan!
Liquidate: Go out of title, or turn into cash.
Loan: The granting of the use of money or equity in return for payment. The loan includes the right of one party to collect from another according to the loan agreement or note. There are existing loans (already there) and new loans (ones just being created).
Loan Constant: See Constant.
Loan to Value Ratio (LTV): The measure of the security of a given loan. It is calculated by taking the amount of the loan and any senior loans and dividing that by the property value. The standard “safe” ratio is 80%.
Loan Value: The maximum of loans that most lenders would lend on a property. Assuming an 80% loan to value ratio, the Loan Value on a $100,000 property would be $80,000.
Long-Term: In private party carry-back notes, long-term depends on the viewpoint of the parties, but generally, long-term would be over 3 years for discount paper.
Commercial Lending Definitions M-N by test author
Marketable: A note is marketable when there are a larg number of potential buyers for it, based on note size, security, yield, and terms.
Market Value: What a normal buyer would pay and a normal seller would sell for in terms of price.
Maturity: The time when an obligation becomes due and payable in full.
MLS: A database of real estate listings for sale. The MLS (Multiple Listing Service) is commonly used by realtors to research what properties are available. Each property listed in the MLS is assigned an eight-digit ID number. The MLS can be useful for finding simultaneous close owner financing note deals.
Moratorium: A suspension of payments and possibly interest.
Mortgage: A security instrument, which pledges a property to insure payment of a note. In case of default, it is foreclosed in the courts.
Mortgage Broker: A party who joins borrowers and lenders for loans, earning a placement fee. Also, an intermediary who buys and sells secured notes.
Mortgage Deed: See Deed of Trust.
Mortgagee: The party who is the beneficiary of a mortgage. The seller of the property who receives the monthly payment and holds the mortgage contract as security.
Mortgage Release: A release of a mortgage by the lender when the loan has been paid in full.
Mortgagor: The party who has pledged the property as security for the mortgage and note. The owner of the real estate. Also the borrower making monthly payments to the mortgagee.
Negative Amortization: A loan payment that is less than interest only. This means the obligation grows with time.
Negative Cash Flow: Cash going out, outflow of money.
Negotiable Instrument: A document such as a personal check or note. It must meet certain legal requirements that allow it to be transferred (negotiated) from one holder to another.
Net Present Value (NPV): The value of a series of uneven cash flows discounted to a present value figure.
Nominal Interest Rate: The interest rate stated in a note. This may be quite different from the yield to an investor who buys the note at discount.
N: the number of payments or compounding periods on a loan.
Note: A written promise to pay, with all the terms and conditions of the obligation signed and in the proper legal format. A note can be secured or unsecured.
Note Holder: The person currently in ownership and possession of a note and entitled to collect all its remaining payments. The holder might not be the original beneficiary.
Note Owner: See Note Holder.
Note Payment Book (Record): A simple record of all payments made on a note showing how much was paid each payment. It breaks each payment down to principal and interest and shows the current principal balance.
Nothing Down: Acquiring property with no cash out of pocket by the buyer. This does not mean that the seller and/or real estate agent did not receive cash. Cash comes from more places than just the buyer.
Notice of Default: A written legal notice to junior lien holders from a senior lien holder, notifying them that the senior lien is foreclosing.
Notice of Trustee’s Sale: Notice published in the newspaper, stating that property in foreclosure is to be sold at auction.
Novation: Rewriting an old document and replacing it with the new one.
This article was published on Friday 22 June, 2007.
Business Loan Definitions R-S (no "Q's") by test author
Rate of Return: See Yield.
Real Estate Paper: Notes secured by real estate and held by private parties; not banks, professional loan finders, or real estate agents in the business of dealing in notes for profit. Real estate paper can include: Mortgages, Deeds of Trust, Security Deeds, and Land Contracts.
Recall: Retrieving data stored in the calculator memory.
Recast: To decide new terms for an existing loan. This may be associated with the situation wherein a debtor cannot pay according to the original terms, but can pay some other way.
Reconvey: When a trust deed is paid off, the trustee reconveys his title back to the property owner and releases the lien from the property. It means to convey title back to the owner of the property.
Reconveyance: See Reconvey.
Recordation: The formal recording (filing) of a legal document such as a security instrument. Recordation with the County Recorder’s Office or other appropriate governmental office serves constructive notice to the world that the document exists.
Recorder’s Office: The local governmental agency responsible for maintaining official records of documents filed therein, such as deeds and security instruments (real estate paper). See Courthouse, Registrar of Deeds.
Recourse: When signing (endorsing) a note from one party to another, you do so either with or without recourse. With recourse means that you still have contingent liability to the buyer of the note. In the event the maker doesn’t pay as promised, you have to pay. See Without Recourse.
Redemption: In a foreclosure situation, redemption means the right to pay off the loan in full plus foreclosure fees and either stop the foreclosure while it is in progress or get the property back after it has been sold. See Redemption Period.
Redemption Period: The period of time during a foreclosure when the debtor has the right to make payment in full and stop the proceedings. Also a period after the property has been sold through foreclosure in which the foreclosed owner can pay the loan amount plus applicable charges and get the property back. This varies according to state law.
Refinance: Paying off an old loan on the property by putting a new, usually larger loan on it. Any remaining funds go to the property owner. See also Hard Money, Personal Liability.
Registers: Storage pockets in the calculator memory. You can store information in the appropriate register and recall it later.
Registrar of Deeds: See Recorder’s Office, Courthouse.
Reinstatement: In the beginning of a foreclosure, the debtor has the right to catch up the payments plus foreclosure fees and reinstate the loan. This means to make it current and stop the foreclosure, just as it was before. During reinstatement it is not necessary to pay the loan in full unless the loan was due anyway.
Reinstatement Period: The period specified by local law, within which the debtor has the right to catch up the payments plus foreclosure fees and stop foreclosure.
Release of Liability: The appropriate documentation from a creditor to a debtor, releasing the debt and any liens associated with it.
Release of Mortgage: A written instrument releasing a mortgage lien from a property. Also called a Certificate of Discharge.
Renegotiate: To change the terms and conditions of an existing note by mutual agreement of Payor and Payee. Either party can ask the other to renegotiate. Asking for a discount for early payoff is a form of renegotiation.
Request for Reconveyance: An instrument executed by a trust deed holder, directing the trustee to convey his title lien on the property back to the Trustor (property owner) The Request for Reconveyance is usually printed on the back of the trust deed.
Reverse Polish Notation (RPN): Calculator logic or way of thinking in which the number is entered before the operation (plus, minus, times, divided by). The Hewlett Packard HP 12c uses RPN.
Risk: A determination of how safe or dangerous something is. An unsecured note generally involves more risk than a well-secured note.
Rollover Note: A relatively short-term (5 year) note that renews each time at some new interest rate pegged to the cost of money at that time.
Rule of 72: A banker’s interest computation invention that allows for greater than normal interest in the early part of the loan. Also a rule of thumb for determining how long it takes to double your money at a certain interest rate. Divide 72 by the interest rate and this close to the number of years it will take to double the money.
Satisfaction of Mortgage: Completion of the terms of repayment and release from liability on a mortgage.
Seasoned Note: A note that has been in existence for a while and has a proven record of satisfactory payments being made. Seasoned notes are typically safer investments than newly created notes. See Green Note.
Second: The lien immediately junior to the First. Recorded second in time.
Secured Loan: A loan (note), which has specific collateral, pledged to secure its payment. In the event payment is not made, the collateral will be sold to provide funds to pay the note.
Security Deed: See Deed of Trust.
Security Instrument: The official legal document which, when properly recorded, places a lien on the property to secure the payment on a note. The most common security instruments are mortgages and trust deeds.
Seller Carry-Back Financing: When the seller of a property takes a note secured by the property as part of the payment. See also Owner Financing.
Seniority: The order in time in which documents are recorded. The first lien recorded is the “First,” the next is the “Second,” etc. Recording, not when notes were created, is what counts. In the event of foreclosure, the lien foreclosing is paid first and the leftover funds, if any, go to the juniors. Senior liens are more secure than junior liens.
Senior Lien: A lien recorded before others. A lien can be senior to some and junior to others. Example: A second is a senior to a third but junior to a first.
Short-Term: In private financing, a note having 3 years or less remaining.
Sign: The plus or minus sign before a number as used in mathematics of addition or subtraction. Also indicating whether a cash flow is positive (in) or negative (out).
Signature Loan: An unsecured personal loan from a bank or credit union.
Simple Interest: Interest based on the principal balance of the loan only. It doesn’t add on to the principal. It does not compound. It is less than compound interest.
Simultaneous Closing: Two transactions or two parts of a transaction that are completed at the same time. Such transactions are often dependent and contingent upon each other. One cannot happen without the other. See Double Escrow.
Soft Paper: Paper with low interest, a long term, low or no payments, and perhaps questionable security. It has little or no marketability for cash and is used mainly in trade. One would like to borrow on soft paper and sell on hard paper.
Stop Date: The date of the last payment on a note. It may be fully amortized or there may be a balloon payment. Also referred to as Call Date.
Storage: Placing a number in a register of memory unit of the calculator for later recal and use.
Straight Note: A note having no payments during its term, with a balloon payment at the end. It may have either simple or compound interest.
Commercial Lending Definitions T-Y by test author
Term: The length of time a loan runs. Example: A 5-year term.
Terms: The main features of a loan: principal amount, interest rate, payment schedule, and due date.
Trust Deed: Or Deed of Trust. A deed given by the borrower to a trustee to be held tending fulfillment of an obligation. This is the security instrument, which pledges the property to insure payment on the note.
Trustee: One who holds property in trust for another to secure the performance of an obligation. An example of a trustee would be a title company or attorney.
Trustor: The person who conveys property in trust. One who deeds his property to a trustee to be held as security until he has performed under the terms of a deed of trust.
Truth in Lending Laws: Legislation that pertains to fair dealing and full disclosure in making new loans. It does not apply to the sale of existing notes.
Uneven Payments: The payments of a loan vary from time to time. They are said to be “uneven” payments. Example: $100/month the first year, then $200/month the second year, and then $300/month thereafter. See IRR
Unmarketable Note: A note which has such soft terms that it cannot be sold for cash. It might be used in trade as part of the down payment on real estate, however.
Unsecured Loan: An unsecured note or personal note. It is secured only by the maker’s written promise to pay. No specific security has been pledged to back up the promise to pay.
Unsecured Note: See Unsecured Loan.
Usury: There are “usury” laws, which specify the maximum rate private parties can charge each other on loans. Above that rate, it is “usury” and the loan would be “usurious.” This involves stiff legal penalties. There is absolutely no limit as to how much yield a person can get when they buy a note at discount, however.
Value: What one party is willing to pay for something. There are as many values for something as there are parties considering owning it. When there is widespread agreement of value, we have a market value (generally agreed-upon price such as the price of gasoline). On the other hand, notes have a less well-defined market. Therefore, negotiation has a large part in determining value or price.
WAC: Weighted Average Coupon – this formula is used to weigh the average yield on a portfolio of two or more notes. To calculate WAC, multiply each note’s coupon (interest) rate by its individual remaining balance; add the products; then divide the result by the total remaining balance. That gives you the approximate existing yield for a package of notes with varied interest rates.
WAM: Weighted Average Maturity – Allows you to calculate the overall maturity rate of a note portfolio, reflecting a truer measure of where the weight falls on a time line. More accurate than an average maturity calculation when dealing with many notes, or where you have the bigger notes for longer terms and a couple of smaller notes on real short terms. A simple average would be extremely distorted in bias toward the low side in remaining months to maturity.
Walking Backwards: A note whose payments are less than Interest Only. This means the amount owed increases with time. See also Negative Amortization, Straight Note.
Without Recourse: The way of endorsing a note to an assignee. This protects the assignor from any further liability on the sale, even in the event the Maker fails to pay on the note. This is the way to sell a note to protect yourself. See also Recourse.
Wrap-Around Contract: A Land Contract that wraps around earlier existing financing. See Wrap-Around Mortgage.
Wrap-Around Mortgage: A larger mortgage that “wraps around” a smaller senior lien. The debtor pays to the holder of the “Wrap-Around” and the holder of the “Wrap” pays on the included senior lien.
Yield: The true rate of return on investment on a note bought at discount, taking into account the actual amount invested and the remaining payments and their timing. The yield is often greater than the interest rate specified in the note itself when the note is bought at discount.
Posted by Commercial Lender at 21:38:45