UNDERSTANDING THE LANGUAGE OF YOUR MORTGAGE

January 4, 2014

A Glossary of Home Loan Terms 

 

To understand the main aspects of the mortgage process, take some time to familiarize yourself with some of the terminology homebuyers encounter:

 

 

Adjustable Rate Mortgage (ARM)

 

A mortgage in which the interest rate is adjustable, meaning the rate can go up or down according to current financial market conditions.

 

Adjustment Frequency


How often the interest rate changes or resets on an Adjustable Rate Mortgage. Typically, the adjustment frequency is once a year, but it can be as often as once a month or as infrequently as once every five years.

 

Annual Percentage Rate (APR)


The actual cost of borrowing money, shown in the form of a yearly rate. The APR will be higher than the interest rate stated in the note due to the fact that it may include the interest, loan discount points, fees and/or mortgage insurance.

 

Assumption


An agreement between a buyer and seller in which the buyer assumes responsibility for the seller’s existing mortgage. This agreement usually saves the buyer money because closing costs and current interest rates, which could be higher, do not apply.

 

Buydown


In exchange for more money upfront, lenders are willing to lower the interest rate they charge, thereby lowering the borrower’s payments.

 

Cap


The highest rate an Adjustable Rate Mortgage can rise to in a specified period of time.

 

Closing


At the conclusion of a real estate sale, the meeting in which the property and funds are exchanged between the two parties involved.

 

Debt-to-Income Ratio


This ratio is calculated by dividing a borrower’s monthly payments, including credit cards and other loans, by the borrower’s gross monthly income. It is used by lending institutions to determine whether a person qualifies for a mortgage.

 

Discount Points


Fees paid to a lender at closing in order to lower the mortgage interest rate. A point is equal to 1 percent of the loan amount. One discount point for $100,000 would cost $1,000.

 

Down Payment


The amount of money allocated by the buyer toward the purchase price of a home.

 

Earnest Money


A modest cash deposit paid by a prospective buyer to prove good faith to bind the sale of real estate. Typically, earnest money becomes part of the down payment if the offer is accepted. It is generally returned if the offer is rejected or forfeited if the buyer backs out of the deal.

 

Equity


The value an owner has in real estate above the amount of debt on the property. For example, a homeowner with a house worth $100,000 and an $80,000 mortgage has $20,000 in equity.

 

Escrow Account


An account in which money for property taxes and insurance is held until paid. Money is added to the account each time a mortgage payment is made.

 

Federal Housing Administration (FHA)


A federal agency established to advance homeownership opportunities. The FHA assists homebuyers by providing mortgage insurance to lenders to cover losses that may occur when a borrower defaults. As a result, lenders are encouraged to make loans to borrowers who might not qualify for conventional mortgages.

 

Fixed Rate Mortgage


A mortgage in which your loan payment and interest rate are fixed for the life of the loan.

 

HUD-1 Form


This form is used by a closing agent to itemize all charges imposed on a borrower and seller in a real estate transaction. It gives a snapshot of the closing transaction, providing each party with a complete list of their incoming and outgoing funds. The HUD-1 is also known as a “closing sheet” or “settlement form.”

 

Interest Only Loan


A loan in which only the interest is paid for a stated term (usually a short period of one to five years) or during a construction period.

 

Loan-to-Value Ratio


The ratio between the amount of the mortgage loan and the appraised value of the property.

 

Market Value


In a competitive and open market, this is the probable sale price of a property.

 

 

Mortgage Insurance


Insurance designed to cover the lender if the borrower defaults on the loan. Depending on the mortgage and the loan-to-value ratio, mortgage insurance may be required by the lender.

 

 

Origination Fee


A lender fee for work involved in preparing and servicing a mortgage application (usually one percent of the loan amount).

 

PITI


Stands for principal, interest, taxes and insurance - the components of a monthly mortgage payment.

 

Underwriting

 

The decision-making process of granting a loan to a potential homebuyer.

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