Call Option
Definition and meaning of Call Option in real estate.
A call option is a clause in a mortgage or loan agreement that gives the lender the right to demand the immediate repayment of the outstanding loan balance under specific conditions.
In more detail
Unlike typical fixed-term mortgages, a loan with a call option allows the lender to accelerate the debt, requiring full payment before the scheduled maturity date. Lenders might exercise this option if interest rates rise significantly or if the borrower violates certain terms of the agreement.
This clause introduces substantial risk for borrowers, who may be forced to refinance or sell the property on short notice. Because of this risk, loans containing call options are rare in standard residential financing.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Also known as | Acceleration clause |
| Applies to | Commercial loans, seller financing, and select private mortgages |
| Watch out for | Hidden call options in private lending agreements that can trigger sudden refinancing needs |
A commercial lender exercises a call option in a balloon mortgage, requiring the real estate investor to pay off the remaining balance after seven years.
Frequently asked questions
Why would a lender include a call option in a loan?
A call option protects the lender against rising interest rates and helps manage financial risk by allowing them to reclaim the capital.
How does a call option differ from a due-on-sale clause?
A call option allows the lender to demand payment under specified contract conditions, whereas a due-on-sale clause is triggered specifically when the property is sold.
Related terms
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