Mortgage Terms

Mortgages can be confusing, but learning the terminology used during the home buying process can make your life easier. Here are some commonly used terms to learn to help you better navigate and understand.

Adjustable-Rate Mortgage (ARM)

A mortgage loan that does not have a fixed interest rate. During the life of the loan the interest rate will change based on the index rate. Also referred to as adjustable mortgage loans (AMLs) or variable-rate mortgages (VRMs).

Amortization

A payment plan that enables you to reduce your debt gradually through monthly payments. The payments may be principal and interests, or interest-only. The monthly amount is based on the schedule for the entire term or length of the loan.

Annual Percentage Rate (APR)

A measure of the cost of credit, expressed as a yearly rate. It includes interest as well as other charges. Because all lenders, by federal law, follow the same rules to ensure the accuracy of the annual percentage rate, it provides consumers with a good basis for comparing the cost of loans, including mortgage plans. APR is higher rate than the simple interest rate of the mortgage.

Appraisal

A document from a professional that gives an estimate of a property’s fair market value based on the sales of comparable homes in the area and the features of a property; an appraisal is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property.

Balloon Loan or Mortgage

A mortgage that typically offers low rates for an initial period of time (usually 5, 7, or 10) years; after that time elapses; the balance due or is refinanced by the borrower.

Closing

The final step in property purchase where the title is transferred from the seller to the buyer. Closing occurs at a meeting between the buyer, seller, settlement agent, and other agents. At the closing, the seller receives payment for the property. Also known as settlement

Closing Costs

Fees for final property transfer not included in the price of the property. Typical closing costs include charges for the mortgage loan such as origination fees, discount points, appraisal fee, survey, title insurance, legal fees, real estate professional fees, prepayment of taxes and insurance, and real estate transfer taxes. A common estimate of a Buyer’s closing costs is 2 to 4 percent of the purchase price of the home. A common estimate for Seller’s closing costs is 3 to 9 percent.

Debt-To-Income (DTI) Ratio

A comparison or ratio of gross income to housing and non-housing expenses. Mortgage lenders will look at this ratio when considering you for a loan. With the FHA, the monthly-mortgage payment should be no more than 29% of monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of income.

Deed

A document that legally transfers ownership of a property from one person to another. This document proves you have ownership of your home. The deed is also known as the title.

Discount Points

Discount points are paid to reduce the interest rate on a loan. They are generally calculated to be equivalent to 1% of the total loan amount. In an ARM, the lender gives up a number of percentage points in interest to give you a lower rate and lower payments. After the discount period, the ARM rate may go up depending on the index rate.

Down Payment

The portion of a home’s purchase price is paid in cash and is not part of the mortgage loan. This amount varies based on the loan type, but is determined by the difference of the sale price and the actual mortgage loan amount. Mortgage insurance is required when a down payment less than 20 percent is made.

Earnest Money (Deposit)

Money put down by a potential buyer to show that they are serious about purchasing the home; it becomes part of the down payment if the offer is accepted. It is returned if the offer is rejected, or is forfeited if the buyer pulls out of the deal. During the contingency period the money may be returned to the buyer if the contingencies are not met to the buyer’s satisfaction.

Escrow

Funds held in an account to be used by the lender to pay for home insurance and property taxes. This allows the borrower to split taxes and insurance over time instead of paying it all at once.

Fixed-Rate Mortgage

A mortgage with payments that remain the same throughout the life of the loan because the interest rate and other terms are fixed and do not change.

Home Inspection

An optional step in the homebuying process. The inspector examines of the structure and mechanical systems to determine a home’s quality, soundness and safety. If a buyer is aware of any issues or repairs needed, they can have the seller fix them or negotiate a lower price.

Homeowners Insurance

An insurance policy that compensates you for damage to a dwelling and its contents including fire, storms or other damages with protection against claims of negligence or inappropriate action that results in someone’s injury or property damage. Most lenders require homeowners insurance and may escrow the cost.

Loan Estimate

A form that provides estimated costs and a clear understanding of the terms of the mortgage loan. This includes the interest rate, monthly payment, total closing costs, and loan specific details.

Loan to Value (LTV) Ratio

A ratio used to determine how qualified you are for a loan. A percentage calculated by dividing the amount borrowed by the price or appraised value of the home to be purchased; the higher the LTV, the less cash a borrower is required to pay as a down payment.

Mortgage Note

A legal document that states how the borrower will repay a loan , the stated interest rate and the period in which the loans have to be repaid.

Mortgage Points

These are fees that can be paid to the lender for a lower interest rate. One point is equal to one percent of the mortgage amount.

PITI: Principal, Interest, taxes, and Insurance

The four elements of a monthly mortgage payment. Principle is the amount owed on a loan at any given time. Interest is the fee charged for the use of borrowing money. Taxes refer to property taxes; these are included in your mortgage payment. Insurance (specifically homeowner’s insurance) provides protection against damage to the home, and any claims of negligence. It is usually required by the lender and may escrow the cost.

Pre-Approval

A pre-approval tells you how much you can take out in a home loan. This loan amount is based on a completed loan application, credit reports, debt, savings which are reviewed by an underwriter. The commitment remains as long as the borrower still meets the qualification requirements at the time of purchase. This does not guaranty a loan until the property has passed inspections underwriting guidelines

Principal

The principal balance is the amount owed on a loan at any given time. It is the original loan amount minus the total repayments of principal made.

Private Mortgage Insurance (PMI)

Insurance purchased by a buyer to protect the lender in the event of default. The cost of mortgage insurance is usually added to the monthly payment. Mortgage insurance is generally maintained until over 20 percent of the outstanding amount of the loan is paid or for a set period.

Property Tax

A tax charged by local government and used to fund municipal services such as schools, police, or street maintenance. The amount of property tax is determined locally by a formula, usually based on a percent per $1,000 of assessed value of the property.

Real Estate Agent

An individual who is licensed to negotiate and arrange real estate sales. These are professionals that can help you shop for a home.

Refinancing

Paying off one loan by obtaining another; refinancing is generally done to secure better loan terms (like a lower interest rate).

Term

The period of time and the interest rate agreed upon by the lender and the borrower to repay a loan.

Title

A legal document establishing the proof of ownership of a home. It is recorded to make it part of the public record. Also known as a Deed.

Title Insurance

Insurance that protects the lender against any claims that arise from arguments about ownership of the property. An insurance policy guaranteeing the accuracy of a title search protecting against errors. Most lenders require the buyer to purchase title insurance protecting the lender against loss in the event of a title defect. This charge is included in the closing costs.

Underwriting

The process of analyzing a loan application to determine the amount of risk involved in making the loan; it includes a review of the potential borrower’s credit history and a judgment of the property value.

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