MORTGAGE GLOSSARY

MORTGAGE GLOSSARY

AMORTIZATION: repayment of a mortgage loan through monthly installments of principle and interest; the monthly payment amount is based on a schedule that will allow you to pay the mortgage off in a specific time period(for example, a 30 year loan)

ANNUAL PERCENTAGE RATE (APR): calculated by using a standard formula, the APR shows the cost of the loan to the consumer expressed as a yearly interest rate, it includes the interest, points, mortgage insurance, and other fees associated with the loan.

APPRAISAL: a document that gives an estimate of the property’s fair market value; an appraisal is generally required by the lender to insure sufficient collateral for the mortgage loan being requested.

ARM: (adjustable rate mortgage) a mortgage loan subject to interest rate changes; when rates change ARM monthly payments increase or decrease at intervals determined by the lender. Interest rate changes are usually subject to a cap or limit.

BALLOON MORTGAGE: a mortgage that typically offers lower rates for an initial period of time(usually 5,7, or 10 years), after that time period elapses the balance is due or the borrower refinances.

BUYDOWN MORTGAGE: a mortgage that allows the borrower to pay points at closing to create a ‘buydown pool’ of funds which, in effect, reduce the interest rate on the mortgage for the first few years.

CASH RESERVES: an amount of money required to be left in the borrower’s accounts after closing on most Conventional loans.

CLOSING: also known as settlement, this is the meeting when the property is formally sold and transferred from the seller to the buyer, the buyer takes on the mortgage debt and all closing costs are paid.

CLOSING COSTS: customary costs above and beyond the sale price of the property that must be paid to cover the cost of transferring ownership of the property at closing, these costs tend to vary by geographic region.

CONVENTIONAL LOAN: a private sector loan not guaranteed or insured by any government agency.

CREDIT SCORE: a number calculated to represent the possibility that a borrower may default; based upon many factors including credit history and is used to determine ability to qualify for most mortgage loans.

DEBT-TO-INCOME RATIO: a comparison of gross income to housing and non-housing expenses (ex. With FHA a persons monthly payment shouldn’t be more than 29% of their gross monthly income and their mortgage payment plus non-housing debts shouldn’t exceed 41%)

DISCOUNT POINT: normally paid at closing and generally equal to 1% of the mortgage amount, discount points are paid to reduce the interest rate on the loan.

DOWN PAYMENT: the amount paid in cash that is the difference between the purchase price and the base mortgage amount.

ESCROW MONEY DEPOSIT: money put down by a potential buyer to show that he or she is serious about purchasing the home; the money becomes part of the downpayment if the offer is accepted, is returned if the offer is rejected, is forfeited if the buyer backs out of the deal.

EQUITY: an owners financial interest in a property calculated by subtracting the balance of the mortgage from the property’s value.

ESCROW ACCOUNT: a separate account into which a lender puts a portion of each monthly payment; an escrow account provides the funds needed for such expenses as RE taxes, homeowners insurance, etc..

FAIR HOUSING ACT: a law that prohibits discrimination in all facets of the home buying process.

FANNIE MAE: (Federal National Mortgage Association) a federally-chartered enterprise owned by private stockholders that purchases residential mortgages and converts them into securities for sale to investors; by purchasing mortgages, Fannie Mae supplies funds that lenders may loan to potential homebuyers.

FARMERS HOME LOAN: a loan guaranteed by the Federal Government’s ‘Guaranteed Rural Housing Dept’; allows for no down payment mortgages to borrowers with good credit in certain rural areas.

FHA: (Federal Housing Administration) established in 1934 to advance homeownership opportunities for all Americans; assists buyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults; this encourages lenders to make loans to borrowers who may not qualify for conventional mortgages.

FIXED RATE MORTGAGE: a mortgage with principle and interest payments that remain the same throughout the life of the loan because the interest rate and other terms are fixed and do not change.

FLOATING RATE: when a borrower decides to not lock-in the interest rate offered by the lender at application, the interest rate can increase or decrease along with market conditions.

FLOAT DOWN: on some mortgage programs with long-term lock in periods, a float down option allows the borrower to re-lock the interest rate once at a lower level.

FREDDIE MAC: (Federal Home Loan Corp) a Federally chartered sister company of Fannie Mae(above) with the same operations.

GINNIE MAE: (Government National Mortgage Association) a government owned corporation overseen by the US Dept of Housing, Ginnie Mae pools FHA-insured and VA-guaranteed loans to back securities for private investment; as with Fannie Mae and Freddie Mac, the investment income provides funding that is then lent to eligible borrowers.

GOOD FAITH ESTIMATE: an estimate of all closing fees including pre-paid and escrow items as well as lender charges. A MUST when shopping for a loan, as the good faith estimate is a full disclosure of lender fees.

HOMEOWNERS INSURANCE: an insurance policy that combines protection against damage to a dwelling and it’s contents with protection against claims of negligence or inappropriate action that result in someone’s injury or property damage; Mandatory for all mortgaged homes.

HUD: (US Dept of Housing and Urban Development) established in 1965, HUD works to create a decent and suitable living environment for all Americans by addressing housing needs, improving and developing American communities, and enforcing fair housing laws.

HUD 1 STATEMENT: also known as the ‘settlement sheet’, it itemizes all closing costs for buyer and seller; it must be given to the buyer at closing.

INDEX: a measurement used by lenders to determine changes to the interest rate charged on an adjustable rate mortgage.

INVESTMENT PROPERTY: a property purchased by a buyer who has no intention of occupying the property, but rather will rent it to someone.

JUMBO LOAN: a loan for more than conforming loan limit set by Fannie Mae and Freddie Mac; because Jumbo loans can not be funded by these two agencies, they normally carry a higher interest rate.

LIEN: a legal claim against property that must be satisfied when the property is sold.

LOAN-TO-VALUE RATIO (LTV): a percentage calculated by dividing the amount borrowed by the price or appraised value of the home to be purchased or refinanced.

LOCK-IN: the guarantee by a lender of a specific interest rate for a loan that closes within a specific time period.

MARGIN: an amount the lender adds to an index to determine the interest rate on an adjustable rate mortgage.

MORTGAGE: a lien on a property that secures a promise to repay a loan.

MORTGAGE INSURANCE PREMIUM (MIP): insurance on FHA loans collected by the Federal govt. to offset the costs of default insurance paid out to lenders; usually un up front premium is financed as well as a monthly premium with the monthly mortgage payment.

PITI: (Principle, Interest, Taxes, and Insurance)the elements of a monthly mortgage payment used to qualify a borrower for a loan.

PMI: (Private Mortgage Insurance) privately-owned companies offer mortgage insurance programs for qualified borrowers with down payments of less than 20% of a purchase price; meant to protect the lender in case of default by the borrower on a conventional loan.

POINT: 1% of a mortgage amount that is paid at or before closing. The payment of points is a pre-payment of interest in order to reduce the interest rate on the loan. (ex: 1 point on a $150,000 loan=$1,500).

PRE-APPROVAL: a determination in writing by a lender of a borrowers buying power as long as the borrower still qualifies at time of purchase.

PRIMARY RESIDENCE: a property to be occupied as a main residence of the borrower(s) within 30 days of closing.

REALTOR: a real estate agent or broker who is a member of the National Association of Realtors, and its local and state associations.

REFINANCING: paying off one loan by obtaining another; refinancing is generally done to secure better loan terms.

RESPA: (Real Estate Settlement Procedures Act); a law protecting consumers from abuses during the residential real estate purchase and loan process including requiring lenders to disclose all settlement costs, practices, and relationships.

SECOND HOME: a property used by the borrower as a part-time residence (i.e. a vacation home).

SETTLEMENT: another name for closing.

SUBORDINATE: to make one lien secondary—of lesser importance—than another.

TITLE INSURANCE: insurance that protects the buyer and lender against any claims that arise from arguments over ownership of the property.

TITLE SEARCH: a check of public records to be sure the seller is the rightful owner of the property and that there are no unsettled liens or other claims against the property.

UNDERWRITING: the process of analyzing a loan application to determine the amount of risk involved in granting the loan; includes a review of the property and the buyer’s creditworthiness.

VA: (Dept of Veterans Affairs) a federal agency which guarantees loans made to veterans; similar to mortgage insurance a VA funding fee is collected, is based on a percentage of the loan amount, and protects the lender against losses that may result from a borrower default. Allows for 100% financing for most veterans.

CALL KEVIN MCGILLOWAY

TODAY

(610)684-4100