Real Estate Financing Explained For You In Simple Math

So you’ve decided to purchase a piece of real estate… great! 

The problem is that you don’t have the money to afford a decent piece. That’s when you need to go to the bank and get a loan or financing plan. 

Here’s how the math works out for a very simple deal: 

Let’s say your property costs $100,000. More than likely, you don’t have 100k in your pocket…  

But the bank does! They can give you the money to purchase the $100,000 property today. 

So what does that mean for you? Well for starters, you're probably going to make something known as a down payment. 

For the sake of this example, let's set that down payment at $20,000. 

Then the rest of the purchase price is going to be financed, and you're going to receive what is known as a note – sometimes referred to as a mortgage note. It’s often secured by a trust deed, but at the end of the day, you have a promissory note. 

Your note is the remainder of the transaction. In this case, it would be $80,000. Here’s how it works:

(Price): $100,000 - (Down payment): $20,000 = (Note): $80,000

The terms of this note can vary from state to state, transaction to transaction. Typically, with monthly payments and interest, it usually can take 15 or 30 years to pay off the note. 

If you're the seller, understanding how to negotiate so that you make sure you secure your investment property is also important. One of the key concepts to understand is loan to value, and you're simply going to take the value of the promissory note. Here’s how it works:

(Note):$ 80,000 ÷ (Price): $100,000 = (Loan To Value Ratio): 80%

So with that, you are now armed and you understand some of the basics of real estate financing. 

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