Mortgage Terminology Reference Guide
There are many factors that come into play when purchasing a home. Most of us focus on the size of the home we can afford and finding that home and not the details of what will be required for the mortgage. Having a mortgage expert like CambridgeHomeLoan.com on your side can help you wade through the details, the various types of loans available to you and the required documentation necessary.
The devil is always in the details. The fees, mortgage insurance if required and possible options of no money down, downpayment assistance and whether a 15 or 30 year mortgage is right for you can be decisions that your mortgage lender can help you decifer.
The terminology that is used by mortgage professionals such as mortgage insurance, equity, escrow or appraisal can be confusing. To help you better understand the mortgage loan process, we have developed the list of common mortgage terms and definitions below. We hop this helps you on your journey as a new homeowner.
– An Adjustable Rate Mortgage, known as an ARM, is a mortgage that has a fixed rate of interest for only a set period of time, typically one, three or five years. During the initial period the interest rate is lower, and after that period it will adjust based on an index. Typically Libor. The rate thereafter will adjust at set intervals. How often that rate adjusts and what it is capped at are key components of an ARM. If you want an initially low rate in the first few years, this may be a good loan for you.
The mortgage rate is the rate of interest that will be paid back to the mortgage lender over a one year time frame. The rate can either be a fixed rate or adjustable rate.
The amortization of the loan is a schedule on how the loan is intended to be repaid. For example, a typical amortization schedule for a 15 year loan will include the amount borrowed, interest rate paid and term. The result will be a month breakdown of how much interest you pay and how much is principal is paid on the amount borrowed. You can run an amortization schedule from a mortgage calculator here.
Appraisal: A report made by a qualified person setting forth an opinion or estimate of property value. The term also refers to the process by which this estimate is obtained. A mortgage appraisal is an appraisal is conducted by a professional appraiser who will look at a property and give an estimated value based on physical inspection of the property and comparable houses that have been sold in recent times in the same basic area..
Assessed Valuation: The value that a taxing authority places on real or personal property for the purpose of taxation.
Assessment: A charge against a property for the purpose of taxation. This may take the form of a levy far a special purpose or a tax in which the property owner pays a share in the cost of community improvements according to the valuation of his or her property.
Appraisal – An appraisal is conducted by a professional appraiser who will look at a property and give an estimated value based on physical inspection of the property and comparable houses that have been sold in recent times in the same basic area..
– A bi-weekly mortgage has an impact on when a loan is paid and how frequently. In a typical mortgage, you make one monthly payment or twelve payments over the course of a year. With a Bi-Weekly payment you are paying half of your normal payment every two weeks. This is the equivalent of thirteen regular payments, which in turn will reduce the amount of interest you pay and pay off the loan earlier.
Borrower: A person (also known as a mortgagor) who receives funds in the form of a loan with an obligation to repay principal with interest.
Buydown: Money advanced by an individual (builder, seller, etc) to reduce monthly payments for a home mortgage either during the entire term or for an initial period of years.
Cash To Close – Liquid assets that are readily available to be used to pay the closing costs involved in a closing of a mortgage transaction.
Closing Costs– Closing costs are the costs that the buyer must pay during the mortgage process. There are many closing costs involved ranging from attorney fees, recording fees and other costs associated with a mortgage closing.
Closing Statement – A form used at closing that gives an account of the funds received and paid at the closing, including the escrow deposits for taxes, hazard insurance, and mortgage insurance.
Collateral– Property pledged as security for a debt, such as the real estate pledged as security for a mortgage.
– A construction mortgage is when a person is having a home-built, they will typically have a construction mortgage. With a construction mortgage, the lender will advance money based on the construction schedule of the builder. When the home is finished, the mortgage will convert into a permanent mortgage.
– What is the debt to income ratio? Lenders look at a number of ratios and financial data to determine . One such ratio is the debt-to-income ratio. In this calculation, the lender compares the monthly payments, including the new mortgage, and . The income figure is divided into the expense figure, and the result is displayed as a percentage. The higher the percentage, the more riskier loan it is for the lender.
– is the amount of the purchase price that the buyer is paying. Generally, lenders require a specific down payment in order to qualify for the mortgage.
– the difference between the value of the home and the mortgage loan is called equity. Over time, as the value of the home increases and the amount of the loan decreases, the equity of the home generally increases.
– at the closing of the mortgage, the borrowers are generally required to set aside a percentage of the yearly taxes to be held by the lender. On a monthly basis, the lender will also collect additional money to be used to pay the taxes on the home when they are due. This escrow account is maintained by the lender who is responsible for paying the tax bills on a regular basis. Escrow accounts can also be used to hold a deposit on a home purchase.
Fair Credit Reporting Act FCRA: A Federal Law which requires a lender who is rejecting information. This law also requires consumer-reporting agencies to exercise fairness, confidentiality and accuracy in preparing and disclosing credit information.
Federal Housing Administration (FHA) – The FHA is a government agency and was created in 1934 under Franklin Roosevelt. The purpose of the FHA is to set standards for construction and underwriting. The FHA also insures loans made by banks and other private lenders.
First Mortgage: A real estate loan, which has priority over any subsequently recorded mortgages, which does not change during the loan term.
-A fixed rate mortgage is a mortgage where the interest rate and the term of the loan is negotiated and set for the life of the loan. The terms of fixed rate mortgages can range from 10 years to up to 40 years.
Foreclosure – A legal procedure in which property mortgage as a security for a loan is sold to pay the defaulting borrower’s debt.
Gift Letter: A written explanation signed by the individual giving the gift stating “this is a bona fide gift and there is no obligation expressed or implied to repay this sum at any time.
– an estimate by the lender of the closing costs that are from the mortgage. It is not an exact amount, however, it is a way for lenders to inform buyers of what is needed from them at the time of closing of the loan.
Gross Monthly Income: Total monthly income earned before tax and other deductions.
Hazard Insurance: A contract whereby an insurer, for a premium, undertakes to compensate the insured for loss on a specific property due to certain hazards. (ie.fire)
Homeowners Association Dues: The fees imposed by a condominium or homeowners association for maintenance of the common areas of the property.
– prior to the mortgage closing date, the homeowners must secure property insurance on the new home. The policy must list the lender as loss payee in the event of a fire or other event. This must be in place prior to the loan going into effect.
Interest Rate: The percentage of an amount of money which is paid for its use for a specific time.
Lien: A legal claim or attachment against property as security for payment of an obligation.
– this is another typical financial calculation that is done is called the Loan-to-Value (LTV) ratio. This calculation is done by dividing the amount of the mortgage by the value of the home. Lenders will generally require the LTV ratio to be at least 80% in order to qualify for a mortgage.
– is the loan and supporting documentation for the purchase of a home. Mortgage lenders generally follow strict underwriting guidelines to limit the possibility of borrowers defaulting on their payments.
Mortgagee: The lender on a mortgage transaction.
Mortgage Insurance Premium (MIP) The consideration paid by a borrower for mortgage insurance-either to the FHA or to a private mortgage insurer.
Mortgagor: The borrower in a mortgage transaction who pledges property as security for a debt.
Non-Conforming Loan: Loans not eligible for sale to Fannie Mae or Freddie Mac due to various reasons including loan amount, credit outside normal underwriting guidelines.
– when applying for a mortgage loan, borrowers are often required to pay an origination fee to the lender. This fee may include an application fee, appraisal fee, fees for all the follow-up work and other costs associated with the loan.
– are percentage points of the loan amount. Often in order to get a lower interest rate, lenders will allow borrowers to . Paying a percentage point up front in order to get a lower rate will eventually be a saving to borrowers in the long run if they stay in the house for the duration of the loan. If they move shortly after buying the property then they will likely lose money buying points.
– is the term used to describe the amount of money that is borrowed for the mortgage. The principal amount that is owed will go down when borrowers make regular monthly or bi-weekly payments.
– When the loan to value (LTV) is higher than 80% lenders will generally not be able to do the transaction. In these cases, the borrowers can get private mortgage insurance (PMI) which is a guarantee to the lender that until the borrower reaches a 80% LTV, they are covered from default. To get this protection, borrowers pay a monthly PMI premium. One popular option to get around paying PMI is to and use it as a down payment on the first.
– prior to closing, the attorneys involved in the mortgage closing will meet to determine the final costs that are associated with the loan. These settlement costs are given to all parties so that they will be prepared to pay the closing costs that have been agreed upon.
Title: The legal evidence of ownership rights of real property.
– the lender is using the home as collateral for the mortgage transaction. Because of this, they need to be certain that the title of the property is clear of any liens which could jeopardize the Mortgage. So, lenders will require borrowers to get title insurance on the property, which will ensure that the homes are free and clear.
– is a federal mandate that all lenders must follow. There are several important parts to the Truth In Lending regulations including proper disclosure of rates, how to advertise mortgage loans and many other aspects of the lending process. These regulations were put into place to protect consumers from potential fraud.
CambridgeHomeLoan.com is here to help you with all of your home loan needs. When you are ready we can help with the latest programs from the FHA, VA, USDA as well as for jumbo loans. We can help pre-qualify you and offer help with downpayment assistance programs, no money down home loans.
If we can’t find the right product for you, it probably doesn’t exist.
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Home Loan Expert Advice
Most borrowers, whether they are purchasing property or refinancing their home, focus on their mortgage rate and loan terms rather than the type of lender