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Twenty Terms You Must Know and Understand Before You Sign Off
On Your Mortgage!
Buying a home is a major achievement in most everyone’s life. Pride of ownership,
tax breaks and equity are just a few of the many benefits you’ll enjoy with
your new home. Your home purchase may also be one of the largest you will ever
make.
During the emotional excitement of buying a home, you may encounter terms with
which you are unfamiliar. For some, it can be bit embarrassing to ask what they
consider too many questions. Others may make a note of their questions but simply
forget to revisit those points. To ensure that you have complete confidence during
your home loan process, invest a moment to read this report and become familiar
with the concepts and terms you’ll encounter. Knowledge is power and the
more you know the more successful will be your decisions and the more soundly
will you sleep at night having made them.
Adjustable Rate Mortgage (ARM)
Also referred to as a Variable Rate Mortgage. A mortgage in which the interest
rate is adjusted periodically based on a pre-selected index.
Annual Percentage Rate (APR)
An interest rate that reflects the cost of a mortgage as a yearly rate. This rate
takes into account any points and fees and is based on the loan going to it’s
full-term.
Assumption
An agreement between 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 the current interest rate, possibly higher, do
not apply.
Buy-down
A method of lowering the buyer’s monthly payment for a short period of time.
The lender or homebuilder subsidizes the mortgage by lowering the interest rate
for the first few years of a loan.
Caps
A limit in the amount the interest rate or monthly payments for an adjustable
rate mortgage that may change.
Closing
Also referred to as settlement. The meeting at the conclusion of a real estate
sale in which the property and funds are exchanged between the two parties involved.
Debt-to-Income Ratio
The ratio, expressed as a percentage, which results from dividing a borrower’s
monthly payment obligation on long-term debts by the borrower’s gross monthly
income.
Discount Points
Prepaid interest assessed at closing by the lender. A point is equal to 1 percent
of the loan amount.
Down Payment
Cash paid by the buyer at closing that makes up the difference between purchase
price and the mortgage amount.
Earnest Money
Money given by a buyer to a seller as a deposit to commit the buyer to the future
transaction. Earnest money is subtracted from closing costs.
Equity
The value an owner has in real estate over and above the obligation against the
property. Equity is fair market value minus the current indebtedness.
Escrow
Funds given to a third party which will be held to cover payments such as tax
or insurance payments and earnest money deposits.
Fixed Rate Mortgage
A mortgage in which the interest rate remains constant throughout the life of
the loan.
Loan-to-Value Ratio
The ratio between the amount of the mortgage loan and the appraised value of the
property.
Market Value
The price that a property could possibly bring in the marketplace.
Mortgage Insurance
Insurance that protects lenders against loss if a borrower defaults. This is required
when the loan-to-value ratio is greater than 80 percent.
Origination Fee
A fee charged by a lender for processing a loan application; usually computed
as a percentage of the loan.
PITI
Refers to Principal, Interest, Taxes, and Insurance.
Underwriting
The decision-making process of granting a loan to a potential homebuyer.
Variable Rate Mortgage
Also referred to as Adjustable Rate Mortgage. A mortgage in which the interest
rate is adjusted periodically based on a pre-selected index.
We sincerely hope this information will help you in gaining a better understanding
of the mortgage process. If we may be of any further service please contact our
office.
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