Real Estate: Key Concepts Overview

• Real estate includes land and permanent structures like buildings and natural resources
• It is a tangible asset that represents ownership rights for buying, selling, leasing, or development
• The value of real estate depends on location, economic conditions, interest rates, and demographic trends
• Residential real estate is property for housing, such as homes, apartments, and condominiums
• Commercial real estate includes properties for business, such as office buildings, retail stores, and industrial warehouses
• Land can include vacant plots, agricultural land, and natural resource reserves

Key Concepts in Real Estate

• Appraisal refers to a professional assessment of a property’s market value
• Property Taxes refer to taxes by local governments on real estate to fund public services
• Zoning Regulations are local laws that govern land use and development
• Title Insurance protects against defects in a property’s title
• Closing Costs refer to expenses incurred during a real estate transaction, such as appraisal fees, title insurance, and recording fees

The Mortgage Industry

• The mortgage industry is responsible for financing real estate purchases through loans using the property as security
• Mortgage lenders give funds to borrowers, who repay the loan plus interest over time
• Banks, credit unions, and mortgage companies are examples of entities in the mortgage industry
• Mortgage-backed securities (MBS) represent claims on cash flows from mortgage loan pools
• Government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac buy mortgages from lenders and securitize them

Types of Mortgages

• Fixed-Rate Mortgages maintain a constant interest rate throughout the loan term
• Adjustable-Rate Mortgages (ARMs) have interest rates that change periodically based on a benchmark index
• Government-Backed Mortgages are insured or guaranteed by agencies like the FHA or VA
• Jumbo Mortgages surpass conforming loan limits set by Fannie Mae and Freddie Mac

Mortgage Process

• Pre-Approval involves a lender assessing how much a borrower can borrow
• Loan Application involves a formal mortgage request with details about the borrower and property
• Underwriting evaluates a borrower’s creditworthiness and the property’s value
• Appraisal refers to an independent property valuation
• Closing is the loan's funding and transfer of property ownership

Key Mortgage Terms

• Principal refers to the original loan amount
• Interest Rate refers to the percentage the lender charges for the loan
• Loan Term refers to the time to repay the loan
• Down Payment refers to the upfront portion of the purchase price
• Private Mortgage Insurance (PMI) protects the lender if the borrower defaults, often for down payments below 20%
• Escrow Account refers to an account held by the lender for property taxes and insurance premiums

Factors Influencing Mortgage Rates

• Economic Conditions such as economic growth, inflation, and unemployment have an affect
• Federal Reserve Policy influences interest rates
• Bond Market: Yields on U.S. Treasury bonds set a benchmark
• Credit Risk or the risk of borrowers defaulting
• Supply and Demand is the balance between mortgage funds available and mortgage demand levels

Risks in the Mortgage Industry

• Credit Risk refers to the risk of borrowers defaulting
• Interest Rate Risk refers to how changes in rates will affect mortgage-related assets
• Liquidity Risk refers to the risk of lenders lacking funds to meet obligations
• Prepayment Risk refers to borrowers repaying early, lowering lender interest income
• Regulatory Risk refers to how regulation changes will affect the mortgage industry

Recent Trends

• Rising Interest Rates have increased due to inflation and Federal Reserve policy
• Digitalization incldues growth of online mortgage lenders and digital mortgage applications
• Housing Affordability Challenges are on the rise as increasing home prices and mortgage rates impact first-time homebuyers
• Increased Regulation refers to regulation in the mortgage industry to prevent risky lending
• Sustainable Mortgages finance energy-efficient homes and sustainable building