Loan lingo

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An ARM loan (Adjustable-Rate Mortgage) is a type of home loan where the interest rate changes periodically based on a benchmark interest rate or index. It typically starts with a lower fixed rate for an initial period (e.g., 5, 7, or 10 years) and then adjusts at regular intervals.

1. Initial Fixed Rate Period – The interest rate is fixed for a set number of years (e.g., 5 years in a 5/1 ARM).
2. Adjustment Period – After the fixed period, the rate adjusts annually (in a 5/1 ARM, the “1” means it adjusts once per year).
3. Index and Margin – The new rate is based on a market index (e.g., SOFR, LIBOR, or Treasury rate) plus a margin set by the lender.
4. Rate Caps – ARMs typically have limits on how much the interest rate can increase per adjustment period and over the life of the loan.
5. Lower Initial Payments – ARMs usually start with lower rates than fixed-rate mortgages, making them attractive to buyers who expect to sell or refinance before the rate adjusts.

• Lower initial interest rates and monthly payments.
• Good for short-term ownership or if interest rates are expected to drop.
• Can allow borrowers to qualify for a larger loan due to lower initial payments.

• Interest rates and payments can increase over time.
• More uncertainty compared to a fixed-rate mortgage.
• If rates rise significantly, payments may become unaffordable.

ARV (After Repair Value) is the estimated value of a property after renovations or improvements are completed. It is commonly used by real estate investors, fix-and-flip professionals, and lenders to determine a property's potential worth post-repair.

ARV=Purchase Price+Renovation Costs+Value Added from Repairs 

1. Fix-and-Flip Investment
    
   • Purchase price: $150,000
   • Renovation cost: $50,000
   • Estimated market value after repairs: $250,000
   • ARV = $250,000
   • This helps investors determine potential profit and financing options.

1. Rental Property Improvement
    
   • Current value: $200,000
   • Renovation cost: $40,000
   • Expected new value based on market comps: $275,000
   • ARV = $275,000
   • This helps investors gauge refinancing options or rent increases.

1. Hard Money Loan Calculation
    
   • A lender offers financing based on 70% of ARV.
   • ARV of the property: $300,000
   • Loan offer: 70% × $300,000 = $210,000
   • The investor must cover the rest through cash or other financing.

ARV is crucial for determining LTV, LTC, and profit margins in real estate investment.

A bridge loan is a short-term loan used to provide immediate financing until a more permanent solution is available. It's typically used in real estate or business transactions to "bridge" the gap between an immediate need for funding and a longer-term financial arrangement.

1. Real Estate Bridge Loan: A real estate investor buys a property at auction but doesn't have immediate access to long-term financing. A bridge loan allows them to close the deal quickly, renovate the property, and refinance with a conventional mortgage later.
    
2. Business Expansion Bridge Loan: A company secures a new office space but is waiting on funds from investors. A bridge loan helps cover the purchase and setup costs until the investment capital arrives.
    
3. Fix-and-Flip Loan: A house flipper needs to quickly purchase and renovate a distressed property before selling it for a profit. A bridge loan provides the necessary funds for acquisition and rehab, with repayment coming from the property's sale.
    

The BRRRR method is a real estate investment strategy that stands for:

Buy → Rehab → Rent → Refinance → Repeat

It’s used by investors to build a portfolio of rental properties with minimal upfront capital by recycling their money through refinancing. Here’s how it works:

• Purchase a distressed or undervalued property at a discount (often through foreclosures, auctions, or motivated sellers).
• Use cash, hard money, or private financing to acquire the property quickly.

• Improve the property to increase its value (fix structural issues, update interiors, improve curb appeal).
• The goal is to force appreciation, making the property worth significantly more than the purchase price plus rehab costs.

• Rent the property to tenants at a profitable rate.
• Ensure the property meets lender requirements for refinancing, such as stable rental income and occupancy.

• After stabilizing the property with tenants, refinance with a long-term loan (often a conventional or DSCR loan).
• Pull out as much of your initial investment (purchase + rehab costs) as possible through a cash-out refinance.
• Ideally, you get most or all of your money back, allowing you to reinvest.

• Use the refinanced funds to acquire another property and repeat the process.
• This allows investors to scale their portfolio without continuously injecting new capital.

✅ Leverages Capital Efficiently – Recovers most of the initial investment to reinvest in more properties.
✅ Builds Passive Income – Rental income provides long-term wealth and financial stability.
✅ Forced Appreciation – Unlike waiting for market appreciation, you increase value through renovations.
✅ Long-Term Financing Benefits – Refinancing into a fixed-rate mortgage provides stable, predictable costs.

❌ Refinancing Risks – If market conditions change, you may not be able to refinance at a favorable rate.
❌ Overestimated ARV (After-Repair Value) – If you miscalculate the future value, you may not recover your initial investment.
❌ Cash Flow Issues – If rent doesn’t cover mortgage, taxes, and expenses, it can hurt profitability.

Would you like help analyzing if BRRRR is a good fit for your current investment strategy?

LTC (Loan-to-Cost Ratio) is a financial metric used in real estate and construction financing to determine the percentage of a project’s total cost that a lender is willing to finance. 

It is calculated as:

LTC=Loan Amount/ total project cost x 100 

• LTC is based on the total cost of the project (including acquisition, construction, and renovation costs).
• LTV is based on the final appraised value of the property after completion.

1. Ground-Up Construction
    
   • Total project cost: $10,000,000
   • Loan amount: $7,500,000
   • LTC = (7,500,000 ÷ 10,000,000) × 100 = 75%
   • The borrower must cover 25% of the cost with equity.

1. Fix-and-Flip Project
    
   • Purchase price: $200,000
   • Renovation cost: $50,000
   • Total project cost: $250,000
   • Loan amount: $200,000
   • LTC = (200,000 ÷ 250,000) × 100 = 80%
   • The investor must contribute 20% in cash or other financing.

1. Commercial Development
    
   • Land purchase: $5,000,000
   • Construction cost: $15,000,000
   • Total project cost: $20,000,000
   • Loan amount: $16,000,000
   • LTC = (16,000,000 ÷ 20,000,000) × 100 = 80%

Most lenders prefer LTC between 70-85%, requiring the borrower to contribute 15-30% of the total project cost to mitigate risk.

LTV (Loan-to-Value Ratio) is a financial metric used by lenders to assess the risk of a loan by comparing the loan amount to the value of the asset being financed. It is calculated as:

LTV=Loan Amount/ propert value x 100

• A higher LTV means the borrower is financing more of the property’s value, which increases the lender’s risk.
• A lower LTV indicates the borrower has more equity in the property, reducing risk for the lender.

1. Home Purchase
    
   • Property value: $500,000
   • Loan amount: $400,000
   • LTV = (400,000 ÷ 500,000) × 100 = 80%
   • This means the buyer is financing 80% of the property’s value and putting 20% down.

1. Real Estate Investment
    
   • Property value: $1,000,000
   • Loan amount: $700,000
   • LTV = (700,000 ÷ 1,000,000) × 100 = 70%
   • A 70% LTV is considered safe for investment properties.

1. Cash-Out Refinance
    
   • Current home value: $300,000
   • Existing loan: $150,000
   • Borrower refinances and takes out an additional $90,000, making the new loan $240,000.
   • LTV = (240,000 ÷ 300,000) × 100 = 80%
   • The borrower still has 20% equity in the home after refinancing.

Most lenders prefer LTV below 80% for lower risk, but some loans, like FHA or hard money loans, may allow higher LTVs with additional requirements.