Basic Terms Do I Need To Know About Mortages?
industry is continuously changing - it's a challenge just to keep
up. New regulations, government programs and terms are always being
created. Therefore, the first step in understanding the mortgage
financing process is to learn the language!
ADJUSTABLE RATE MORTGAGE (ARM) - A loan that allows the lender
to adjust the borrower's interest rate and payments at prescribed
times and sometimes with prescribed limits. Lower interest rates
AMORTIZED LOAN - A loan which is paid off in equal installments
during its term.
ANNUAL PERCENTAGE RATE - The actual interest rate the borrower
pays when all the costs of obtaining credit are included.
APPRAISAL - A report made by a qualified appraiser setting
forth an opinion of estimate of value. The term also refers to the
process by which the estimate is obtained.
APPRAISED VALUE - An estimation of property value made by
a qualified expert.
APPRECIATION - An increase in the value of a property. Appreciation
may be the result of an increased demand for property, any improvements
or additions made, improvements to the neighborhood, etc.
BALLOON MORTGAGE - A mortgage with periodic installments
of principal and interest that, at the end of such a period, do
not fully amortize the loan. The balance of the mortgage due is
usually paid in a lump sum at a specified date, usually at the end
of the term of such periodic installments.
CLOSING - The process that brings a loan into legal existence,
including the signing of all loan documents, their delivery to the
appropriate parties, and the disbursing of at least some of the
CLOSING COSTS - These are costs which are not controlled
by the lender, and are required for anyone purchasing a home regardless
of loan amount or lender. These include expenses such as attorney
fees, title insurance, survey, recording fees, appraisal, and termite
inspection. All of these services are provided by independent professionals
who are not affiliated with your lender. You can usually figure
on your closing costs being approximately one to one & a half
percent of your loan amount.
COMPARABLES - Properties used in an appraisal report that
are substantially equivalent to the subject property.
CONVENTIONAL LOAN - A loan that may or may not require Private
Mortgage Insurance. (Any loan amount with 20% or more down payment
will not require PMI. Any loan amount with zero or 3% - 19% down
payment will require PMI.) This type of loan is subject to the qualifying
guidelines set forth by FNMA (Fannie Mae) or FHLMC (Freddy Mac).
CREDIT HISTORY - This is a "snap-shot" of your
past and present debt, current available credit, and a rating of
your debt repayment history. This is very important to a lender
so that they can know if you are a good credit risk.
CREDIT REPORT - A document completed by a credit-reporting
agency providing information about the buyer's credit cards, previous
mortgage history, bank loans and public records dealing with financial
DEED - The formal written document that transfers the rights
of ownership and possession (that is, the title) from the seller
to the buyer.
DISCOUNT POINT - A unit of measurement used for various loan
charges; one point equals one percent of the amount of the loan.
DOWN PAYMENT - The difference between the loan amount and
the sales price of the home you are purchasing. This is measured
in a percentage; for example, a 3% down payment on a $70,000 home
would be $2100.
EQUITY - The owner's interest, or the amount of cash the
owner has, realized, paid in or invested in real estate.
ESCROW PAYMENT - The portion of a borrower's monthly payment
that is set aside by the lender in an escrow account to pay the
taxes, hazard insurance, mortgage insurance, ground rents and other
special items as they come due.
FHA LOAN - A loan that is insured by the Federal Housing
Authority. This type of loan is geared toward providing moderate
to low income families mortgages, and is subject to the qualifying
guidelines set forth by the Federal Housing Authority.
FIXED-RATE MORTGAGE - The type of loan where the interest
will not change for the entire term of the loan.
GOOD FAITH ESTIMATE - Provides a breakdown of the estimated
HOME EQUITY LOAN - A loan under which a property owner uses
his or her residence as collateral and can then drew funds up to
a prearranged amount against the property.
INTEREST RATE - The percentage of interest charged on the
amount of money borrowed. This rate will vary slightly from lender
to lender, and will vary according to the type of mortgage chosen
(30 year fixed, 3 year adjustable, etc.). Now is an excellent time
for mortgage interest rates, as 1996 has ushered in consistently
low rates that are in fact the lowest in over 30 years!
LOAN-TO-VALUE RATIO (LTV) - The ratio, expressed as a percentage,
of the amount of a loan (numerator) to the value or selling price
of the property (denominator). Usually, the higher the percentage,
the greater the interest charged.
MORTGAGE BROKER - A mortgage broker is different from a single
lender/bank, in that they represent many different lenders in much
the same way a travel agent represents many different airlines.
Most people don't call a single airline and expect to get a complete
picture of all available flights and prices, and yet some people
will call a single lender/bank and end up choosing the wrong type
of financing which can literally cost them thousands of dollars.
A mortgage broker's knowledge and complete view of all financing
options can enable people with low income, self-employment, commissioned
income, or even credit problems to obtain excellent financing. A
mortgage broker's compensation as your consultant (much the same
as a travel agent) is a finders fee paid by the lender. These lenders
always offer better rates and superior prepayment privileges and
often shave as much as a half percent point off the normal market
ORIGINATION FEE - The fee that the lender charges the borrower
to cover the cost of issuing a loan commitment. It pays for processing
the loan which includes collecting information about the borrower's
ceditworthiness and the property. The fee is usually computed as
a percentage of the mortgage loan. It usually does not include fees
for appraisals, credit reports, inspections and loan document preparation.
POINTS - An amount equal to one percent of the principal
amount of a note. Loan discount points are a one-time charge assessed
at closing by the lender to increase the yield on the mortgage loan
to a competitive position with other types of investments.
PRE-PAID COSTS - These are the costs that cover your escrow
account for the future payment of interest, property taxes and homeowners
insurance. Property taxes are set by the appropriate government
taxing authority and, unfortunately, are not negotiable. Depending
on the regulatory agency, (FHA, Fannie Mae, etc.) you will be required
to pre-pay anywhere from 2 to 11 months of property taxes at closing.
Premiums for homeowners insurance are set by the insurance company
you select, and you are required to pay your first year homeowners'
insurance plus two additional months at closing. You can usually
figure on your pre-paid costs being approximately one to one &
a half percent of your loan amount.
PRIVATE MORTGAGE INSURANCE - This insurance is required for
most loans that have a down payment of 20% or less. Private Mortgage
Insurance insures the lender in the event that you default on your
mortgage payment and the lender is forced to sell your property
at a loss.
TITLE - The evidence of the right to or ownership in property.
In the case of real estate, the documentary evidence of ownership
is the title deed, which specifies in whom the legal state is vested
and the history of ownership and transfers. Title may be acquired
through purchase, inheritance, devise, gift or through the foreclosure
of a mortgage.
TITLE INSURANCE - An insurance policy which protects the
insured (purchaser or lender) against loss arising from defects
UNDERWRITING - In mortgage lending, the process of approving
or denying a loan based on an evaluation of the property and the
applicant's creditworthiness and ability to repay the loan. The
underwriter analyzes the risks involved and selects an appropriate
loan term and interest rate.
VA LOAN - A loan that is insured by the Department of Veteran's
Affairs. This type of loan is available only to veterans, and is
subject to the qualifying guidelines set forth by the Department
of Veteran's Affairs.