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Mortgage
Terms
Shopping
for a home can be exciting but also very confusing. You
may have already discovered that there are many unfamiliar
terms in the mortgage industry. For example, you've probably
heard terms such as "ARM," "discount points,"
and "escrow account." Because you may be wondering
what this terminology means, this web site contains a glossary
of the most common terms used during the mortgage financing
process. It is important that you completely understand
these terms before you sign your mortgage. Your loan officer
can explain these terms in greater detail and also provide
you with more information.
Adjustable
Rate Mortgage (ARM): A mortgage loan in which the market
conditions determine fluxuations in the interest rate. Changes
in the interest rate are determined by a financial index.
ARM loans have a cap or a limit on how much the interest
rate can change.
Amortization:
Repayment of a mortgage loan with equal periodic payments
of both principal and interest. The payments are calculated
so that the debt is paid off at the end of a fixed period
of time.
Annual
Percentage Rate (APR): A term that expresses the cost of
a mortgage as an annual rate. The APR is normally higher
than the advertised interest rate because it includes interest,
points, and other finance charges. The APR is used to compare
different types of mortgages.
Appraisal:
A report created by a qualified appraiser that is an estimate
of the value of the property being purchased.
Assessment:
An assessed value given to property which is used solely
for determining property taxes.
Asset:
An item that has monetary value such as cash, stocks and
real estate. Information about your assets is required when
applying for a mortgage loan.
Balloon
Mortgage: a short-term mortgage loan of equal monthly payments
in which a large final payment (balloon) is due on a specified
date. The final payment is equal to the remaining balance
of the loan.
Biweekly
Mortgage: A mortgage loan in which payments are due every
two weeks, totaling 26 (or possibly 27) payments each year.
Closing:
The final step in the mortgage loan process which follows
underwriting. The closing is a meeting between the homebuyer,
seller and lender in which mortgage documents are signed
and title to the property passes from the seller to the
buyer. At the same time, the homebuyers receives the funds
needed to purchase the property and pledges the property
as security for repayment of the debt.
Closing
Costs: Fees paid at closing which are usually 3 to 6 percent
of the mortgage amount. Some examples of closing costs are:
realtor fees, appraisal fees and taxes.
Collateral:
Property pledged as security for repayment of the mortgage
loan.
Conventional
Loan: A mortgage loan made by an approved lender in which
the borrower's ability to repay the debt is not insured
by a government agency such as the FHA or VA.
Convertible
Mortgage: a type of adjustable rate mortgage loan that can
be converted to a fixed-rate mortgage.
Discount
Points: Also called "points". A one-time charge
paid to the lender at closing to obtain a lower interest
rate on the mortgage loan. One point is equal to 1 percent
of the loan amount. For example, two points on a $100,000
mortgage would cost $2,000.
Escrow
Account: An account often required by the lender to pay
taxes and insurance. Every time a mortgage payment is made,
a portion goes into the escrow account. When the taxes and
insurance bills are due on your own home, the lender pay
the bills with funds from this account.
Equity:
The amount of the home that you actually own. Equity is
the difference between the market value of the home and
what you still owe on it.
Federal
Housing Administration (FHA): A division within the Federal
Department of Housing and Urban Development (HUD) that provides
mortgage insurance for residential mortgages and sets standards
for construction and underwriting.
FHA
Loan: A mortgage loan made by an approved lender in which
the Federal Housing Administration insures the borrower's
ability to repay the debt.
Good
Faith Estimate: An estimate of the fees you will be required
to pay at closing. It is required by law that the lender
provide the good faith estimate within three days of your
initial loan application.
Growing
Equity Mortgage (GEM): A type of mortgage loan in which
payments increase yearly until the mortgage is paid off.
The increasing payments are applied directly to the principal,
allowing the homebuyer to acquire equity more rapidly and
pay off the mortgage sooner.
Housing-to-Income
Ratio: A ratio that compares all your monthly housing expenses
to your monthly income. Normally, housing expenses are equivalent
to 28 percent of your monthly income. This ratio is used
by the loan to see if you qualify for a mortgage.
Mortgage:
A legal document that pledges you r property as security
for repayment of the Mortgage loan.
Mortgage
Broker: A real estate financing professional who brings
homebuyers and sellers together arrange funding and negotiate
contract.
Mortgage
Insurance: Insurance that protects the lender in case the
house payments are not made. Typically you would be required
to pay a fee for mortgage insurance if your down payment
is less than 20 percent.
Mortgage
Note: A document that you sign at closing which states your
promise to pay a um of money at a specific rate for a fixed
period of time.
Mortgagee:
the lender
Mortgagor:
the homebuyer or borrower
Origination:
The first step in the mortgage loan process. During the
origination phase, a loan application is filled out with
details of your financial position. You will be asked to
provide supporting documentation such as W-2s and paystubs.
Your loan officer will then be required to provide you with
Good Faith Estimate and a Truth-in-Lending disclosure shortly
after your initial loan application.
Origination
Fee: A fee that the lender charges the homebuyer for the
service of creating the mortgage loan. You will not have
an origination fee if you are using the services of a Mortgage
Broker.
Points:
See Discount Points.
Prequalification:
A process in which the loan officer calculates the housing-to-income
ration and the total debt-to-income ratio to see if you
qualify for a mortgage loan.
Principal:
The amount owed on a loan, excluding interest.
Private
Mortgage Insurance (PMI): Insurance provided by a private
mortgage insurance company that protects the lender in case
the house payments are not made. Typically, you would be
required to pay a fee for mortgage insurance if your downpayment
is less than 20 percent.
Processing:
The second step in the mortgage loan process which follows
origination. During processing, documents are collected
and your loan file is examined to ensure that all information
is complete and accurate. Verifications, appraisals, credit
reports and other necessary documents are ordered at this
time.
Recording
Fees: Fees that the lender charges for officially recording
the signed mortgage documents to make them a public record
Servicing:
Activities that the lender performs such as collecting the
payments and paying taxes and insurance if you have an escrow.
Title:
A document describing the legal owner of a specified piece
of property. The title is sometimes called the deed.
Title
Insurance: An insurance policy which insures the homebuyer
against errors in the title search. The fee for the title
insurance policy is paid at closing.
Title
Search: An examination of officially recorded documents
to determine the legal ownership of property.
Total
Debt-to-Income Ratio: A ratio which compares all of your
monthly debt payments, such as credit cards and car payments,
to your monthly income. Normally, your monthly debt payments
are equivalent to 36 percent of your monthly income. This
ratio is used by the loan officer to see if you qualify
for a mortgage loan.
Truth-in-Lending
Disclosure: A document which the lender is required by law
to give to the homebuyer shortly after loan application.
This disclosure gives detail of the house payments along
with the corresponding APR.
Underwriting:
The third step in the mortgage loan process which follows
processing. During underwriting, the documents in the loan
file are evaluated to determine whether the loan should
be approved, denied, or approved with conditions.
Veterans
Administration (VA): Known as the Department of Veterans
Affairs, an agency within the Federal Government which administers
benefit programs for veterans.
VA Loan:
A long-term, low or no-downpayment mortgage loan in which
the Veterans Administration guarantees the homebuyers' ability
to repay the debt. Only veterans are eligible for this type
of loan.
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