Sequential completion: Chapter 10 is the first financing destination and is developed without changing any prior chapter.

Learning Objectives

• Distinguish a promissory note from a security instrument.
• Explain mortgages, deeds of trust, hypothecation, liens, equity, priority, and foreclosure.
• Calculate loan-to-value ratio, interest, points, and basic amortization relationships.
• Compare fixed, adjustable, balloon, fully amortized, and partially amortized structures.
• Distinguish assumption, subject-to transfer, novation, and due-on-sale provisions.
• Identify borrower and lender risks and appropriate broker disclosures.

Key Vocabulary

Term	Definition
Promissory Note	Borrower’s written promise to repay debt under stated terms.
Mortgage	Security instrument pledging real property for repayment.
Hypothecation	Pledging property as security while retaining possession.
Mortgagor	Borrower who gives a mortgage.
Mortgagee	Lender receiving the mortgage.
Equity	Market value minus debt and other claims considered.
Loan-to-Value (LTV)	Loan amount divided by value or price under the lender’s rules.
Amortization	Repayment through installments reducing principal over time.
Balloon Payment	Large remaining amount due at the end of a loan term.
Discount Point	Prepaid finance charge equal to 1% of loan amount.
Acceleration Clause	Allows the lender to declare the full balance due after specified default.
Due-on-Sale Clause	Allows acceleration upon unauthorized transfer.
Defeasance Clause	Requires release of the security claim when debt is satisfied.
Assumption	Buyer takes title and agrees to become liable for existing debt, subject to lender and contract requirements.
Subject To	Buyer takes title with existing debt remaining, generally without assuming personal liability to the lender.

Core Lesson

Debt and Security Are Separate

The note is evidence of debt and states principal, interest, payment, maturity, late charges, and default. The mortgage or other security instrument creates a lien or security interest in real estate. A borrower can owe the note even when a defect affects security, and paying the note requires release or satisfaction of the security instrument.

Parties and Lien Theory

The mortgagor is the borrower; the mortgagee is the lender. Under lien theory, the borrower retains legal title while the lender holds a lien. Title-theory and deed-of-trust systems allocate interests differently. State law controls foreclosure, redemption, deficiency, and document terminology.

Priority and Recording

Lien priority often follows “first in time, first in right,” modified by recording statutes, tax liens, mechanics liens, subordination, purchase-money rules, and other law. Recording gives notice and protects priority; it does not prove the debt is fair or that every lien has been found.

Equity and LTV

Equity = Value − Debt.
LTV = Loan ÷ Value.

A $240,000 loan on a $300,000 value has 80% LTV. Higher LTV means less borrower equity and generally more lender risk. Combined LTV considers multiple secured loans.

Interest and Points

Simple annual interest equals principal × rate × time. One point equals 1% of loan amount. Two points on $180,000 equal $3,600. Points affect cash needed and borrowing cost; they do not reduce principal unless the agreement says so.

Amortization

A fully amortized level-payment loan reaches zero at maturity through scheduled principal and interest payments. Early payments generally contain more interest because the outstanding principal is larger. A partially amortized loan uses payments based on a longer schedule but matures sooner, leaving a balloon. Negative amortization occurs when scheduled payments fail to cover accrued interest and principal grows.

Fixed and Adjustable Rates

A fixed rate does not change during its fixed term. An adjustable-rate mortgage uses an index plus margin, with adjustment periods and caps. The initial rate may be temporary. Students should distinguish the index, which moves, from the margin, which is lender-added under the note.

Default and Foreclosure

Default may trigger late charges, acceleration, collection, foreclosure, receivership, or other remedies. Foreclosure enforces security and may result in sale. Whether deficiency or redemption is available is state-specific. Brokers must not promise that surrendering property eliminates personal debt.

Transfer of Encumbered Property

With assumption, the buyer agrees to liability, but the original borrower may remain liable unless released by the lender through novation or other written release. A subject-to buyer takes title while the original borrower remains liable. A due-on-sale clause may allow acceleration. Always obtain lender and legal guidance before marketing creative transfer structures.

Indiana Law Spotlight

Partially verified against current authority. Indiana Code Title 32 contains the principal statutory framework for mortgages, mortgage foreclosure, recording-related property procedures, and qualifying residential mortgage-foreclosure settlement conferences. Current Indiana Judicial Branch guidance confirms that a borrower in a qualifying foreclosure action may request the statutory settlement-conference process described in IC 32-30-10.5. This supports the chapter's instruction that foreclosure is a legal process—not an ordinary brokerage sale—and that a broker must not promise surrender or foreclosure will eliminate personal debt.

Still open: Verify Indiana's precise mortgage-theory characterization; execution, acknowledgment, recording, assignment, priority, subordination, satisfaction and release requirements; acceleration and notice; foreclosure parties and procedure; settlement-conference eligibility and timing; sheriff-sale notice, bidding, deed and surplus; any pre-sale or post-sale redemption right; deficiency judgment availability and limits; limitation periods; federal servicing and due-on-sale overlays; and the broker's boundary from legal, lending, title, and foreclosure-consulting work. These outcomes remain instrument-, lien-, property-, borrower-, and case-specific.

Official sources: Current Indiana Code Title 32; Indiana Judicial Branch mortgage-foreclosure assistance; Indiana foreclosure self-service guidance; Indiana Attorney General homeowner protection.

National Exam Alert

Note = debt; mortgage = security. Mortgagor borrows; mortgagee lends. One point equals 1% of the loan.

Common Exam Trap

Do not calculate equity from original price when current value is given. Do not assume loan assumption releases the seller. Do not confuse an acceleration clause with a due-on-sale clause.

PASS FIRST Memory Trick

“OR owes; EE receives”: MortgagOR owes; mortgageE receives the lien.
VLP: Value → Loan → Percentage for LTV.

Broker Insight

Ask for a current payoff, not the latest statement balance. Confirm liens, prepayment terms, assumability, and lender approval before representing net proceeds or transfer options.

Chapter Summary

• The note creates debt; the mortgage secures it.
• LTV measures loan relative to value.
• Points equal percentages of loan amount.
• Amortization reduces principal; balloons leave a balance.
• ARMs use an index, margin, adjustment rules, and caps.
• Assumption differs from subject-to transfer.
• Indiana's statutory foreclosure and qualifying settlement-conference framework is partially verified; mortgage theory, priority, releases, sheriff sales, redemption, deficiencies, limitation periods, and broker scope remain queued.

Practice Questions

1. Which document is the borrower’s promise to repay?
   1. Mortgage
   2. Promissory note
   3. Deed
   4. Appraisal
2. Which document secures repayment with real property?
   1. Lease
   2. Survey
   3. Note only
   4. Mortgage
3. The mortgagor is the:
   1. Borrower
   2. Lender
   3. Appraiser
   4. Closer
4. A $160,000 loan on $200,000 value has LTV of:
   1. 60%
   2. 70%
   3. 80%
   4. 90%
5. Value is $280,000 and debt is $190,000. Equity is:
   1. $470,000
   2. $190,000
   3. $90,000
   4. $280,000
6. Two points on $250,000 equal:
   1. $2,500
   2. $5,000
   3. $500
   4. $25,000
7. A loan paid to zero by scheduled maturity is:
   1. Subject to
   2. Negatively amortized
   3. Interest only forever
   4. Fully amortized
8. A large balance due at maturity is a:
   1. Balloon
   2. Margin
   3. Point
   4. Index
9. In an ARM, the lender-added component is the:
   1. Index
   2. Margin
   3. Cap
   4. Escrow
10. Which clause can make the full balance due after default?
    1. Defeasance
    2. Habendum
    3. Acceleration
    4. Prepayment
11. Which clause may apply after unauthorized transfer?
    1. Due-on-sale
    2. Defeasance
    3. Subordination
    4. Release
12. Buyer takes title and agrees to personal liability for existing debt. This is:
    1. Subject to
    2. Novation only
    3. Foreclosure
    4. Assumption
13. Buyer takes title while original borrower generally remains liable. This is:
    1. Assumption with release
    2. Defeasance
    3. Subject to
    4. Amortization
14. What releases the original borrower after assumption?
    1. Buyer promise alone
    2. Lender-approved release or novation
    3. Broker statement
    4. Recording deed
15. Negative amortization means:
    1. Title transfers
    2. Loan is paid early
    3. Rate is zero
    4. Principal may increase
16. Which usually has priority subject to exceptions?
    1. Earlier perfected lien
    2. Newest contract
    3. Last recorded always
    4. Listing agreement
17. Hypothecation means:
    1. Selling property
    2. Renting property
    3. Pledging property while retaining possession
    4. Removing lien
18. Which clause requires security release after payment?
    1. Acceleration
    2. Due-on-sale
    3. Prepayment penalty
    4. Defeasance
19. A broker promises foreclosure cancels all debt. Best assessment?
    1. Always correct
    2. Improper; deficiency and release are state- and fact-specific
    3. Required disclosure
    4. Tax advice only
20. Principal $100,000 at 6% simple annual interest produces one-year interest of:
    1. $6,000
    2. $60,000
    3. $600
    4. $106,000

Detailed Answer Explanations

1. B. The note states the debt and repayment promise; the mortgage supplies real-estate security.
2. D. A mortgage pledges property to secure the note.
3. A. The mortgagor gives the mortgage and is the borrower.
4. C. $160,000 ÷ $200,000 = 80%.
5. C. $280,000 − $190,000 = $90,000 equity before other claims or costs.
6. B. Each point is 1%; 2% of $250,000 is $5,000.
7. D. Full amortization reduces scheduled principal to zero at maturity.
8. A. A balloon is the remaining large maturity payment.
9. B. The index changes with the market; the margin is added by the lender.
10. C. Acceleration makes the remaining balance due after specified default.
11. A. A due-on-sale clause addresses unauthorized transfer.
12. D. Assumption means the buyer agrees to become liable, subject to lender terms.
13. C. Subject-to transfer leaves the loan and original borrower liability in place absent release.
14. B. Only the lender can release its borrower through an authorized written arrangement.
15. D. If payments do not cover interest, unpaid interest can be added to principal.
16. A. Earlier perfected interests often have priority, subject to important statutory and contractual exceptions.
17. C. Hypothecation allows possession while property secures debt.
18. D. Defeasance requires the lender’s security interest to be released after satisfaction.
19. B. Foreclosure and personal liability are state-specific legal matters; a broker cannot guarantee release.
20. A. $100,000 × 0.06 × 1 = $6,000.

Mastery Checklist

• I can distinguish note and mortgage.
• I can identify mortgagor and mortgagee.
• I can calculate equity, LTV, interest, and points.
• I can compare amortization structures.
• I can explain ARM index, margin, and caps.
• I can distinguish acceleration, due-on-sale, and defeasance.
• I can compare assumption and subject-to transfer.
• I can identify Indiana financing rules requiring verification.
• I can score at least 80% and explain every answer.