Learn the Lingo

 The mortgage industry can be very confusing for most people. With the terminology used in discussing mortgages such as appraisals, equity, escrow, points and settlement costs, most common people can become easily confused. Mortgage professionals can speak in a language all of their own and the lingo used is unique. To help take the confusion out of the Mortgage process, we have come up with a listing of some of the more commonly used mortgage terms, and definitions in plain language. We hope this list is helpful to those that are looking to become homeowners:

Adjustable Rate Mortgage - 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. The rate thereafter will adjust at set intervals.

Annual Percentage Rate - is the rate of interest that will be paid back to the mortgage lender. The rate can either be a fixed rate or adjustable rate.

Amortization - 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 paid on the amount borrowed.

Appraisal - is conducted by a professional appraiser who will look at a property and give an estimated value based on physical inspection and comparable houses that have been sold in recent times.

Appreciation - the measurable value that increases on a home or property. Market improvements and home renovations often drive appreciation value.

APR (Annual Percentage Rate) - The measurement of the full cost of a loan including interest and loan fees expressed as a yearly percentage rate. Because all lenders apply the same rules in calculating the annual percentage rate it provides consumers with a good basis for comparing the cost of different loans.

Assessed value - a value determined by local government assessors and used to calculate annual property or real estate taxes.

Assumable mortgage - a type of mortgage that may be transferred, interest rate and all, from seller to buyer - like FHA loans.

Bi-Weekly Mortgage - this type of 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 -  the individual or individuals extended a loan and mortgage for the purchase of a house and/or property. Borrower is responsible for making all payments and fees associated with the loan over the life of the loan. Legal

mortgagor.

Bridge loan - a short-term loan used to quickly effect a sale while pending more conventional real estate financing. While not popular, a bridge loan can be useful particularly for certain commercial real estate deals.

 

Buy down - a situation in which a seller or lender kicks in a sum of money in order to lower the initial interest rate on a home loan to make a sale more appealing for the buyer.

 

Buyer's agent - real estate agent that works on behalf of the home buyer.

 

Cap - maximum monthly payment a borrower may be expected to pay on a loan.

 

Capital gain - profit earned on an asset, such as a home or property.

 

Capital gain tax -  a tax levied against the profit made on the sale of a home and/or property.

 

Closing - the formal documented sale of a home and/or property that includes signing all documents associated with the exchange and payment of required closing fees. A closing agent usually oversees this process.

 

Closing agent - the person responsible for mediating the closing, documenting the process and assuring all associated paperwork is completed. May be an attorney or official from a title or mortgage company.

Closing Costs- these 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 the mortgage closing.

Construction Mortgage - 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.

Conventional Mortgage – any mortgage loan that is not insured or guaranteed by the federal government.

Debt-to-income Ratio - lenders look at a number of ratios and financial data to determine if the borrowers are able to repay the loan. One such ratio is the debt-to-income ratio. In this calculation, the lender compares the monthly payments, including the new mortgage, and compares it to monthly income. 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.

Deed of Trust – a security instrument between the borrower and the lender, recorded in public records as a lien on the subject property. It differs from a mortgage in that the bank can foreclose on the property without judicial proceedings.

Down Payment- 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.

Equity - 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.

Escrow - 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. This escrow account is maintained by the lender who is responsible for sending the tax bills on a regular basis.

 

Federal Funds Rate – the interest rate banks charge one another for overnight use of excess reserves.

Federal Home Loan Mortgage Corporation – one of the largest financiers of conventional mortgages on the secondary market. Widely known as Freddie Mac.

Federal National Mortgage Corporation – a publicly owned, government-sponsored corporation that packages mortgages and resells them on the secondary market. Also known as Fannie Mae.

FHA Loan – a program originated during The Great Depression that allows lower income borrowers to qualify for mortgages as long as they fit certain criteria set forth by the Federal Housing Administration who insures them.

First-Time Home Buyer – typically defined as someone who has not owned another property at any time during the three years prior to the date of the purchase.

Fixed-Rate Mortgage – a mortgage with a constant interest rate that will not adjust at any point during the life of the loan.

Foreclosure – the legal process by which a bank or lender sells a property after a borrower fails to meet the repayment terms of the loan.

Good Faith Estimate - 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.

Homeowner's Insurance - 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.

Loan-to-value Ratio - 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.

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.

Origination Fee - 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.

Points - are percentage points of the loan amount. Often in order to get a lower interest rate, lenders will allow borrowers to "buy down" the rate by paying points. 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.

Principal - 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.

Private Mortgage Insurance - 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 take a second mortgage and use it as a down payment on the first.

Quitclaim Deed – a document by which a person either disclaims interest in a property or transfers interest to another person, typically a spouse.

Refinance – the act of replacing your existing loan(s) with a new loan on the same property. There are two main types of refinancing, including a rate and term refinance and cash-out refinance.

Reserve Requirements – the amount of verifiable assets you need to qualify for a given mortgage.

Reverse Mortgage – a mortgage reserved for homeowners aged 62 or older who wish to tap their home equity without paying monthly mortgage payments.

Right of Rescission – a law which allows a homeowner to rescind a contract to refinance their primary residence within three days of signing loan documents.

Second Mortgage – a mortgage taken out behind a first mortgage, either concurrently or after the fact.

Seller Carryback – when a seller acts as the bank or lender and carries a second mortgage on the subject property.

Settlement Costs - 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.

Short Sale – a foreclosure alternative where a property is sold for less than the balance on the associated mortgage.

Short Refinance – a refinance transaction where the lender agrees to lower the rate and/or change the term despite the mortgage balance exceeding the property value.

Stated Income Mortgage – a mortgage in which the borrower does not have to document their income.

Streamline Refinance – an expedited refinance that requires limited underwriting, and may even forego the need for an appraisal.

Subprime Mortgage – a home loan reserved for those who have marginal credit or difficulty qualifying for a traditional loan.

Teaser Rate – the initial, discounted interest rate offered on adjustable-rate mortgages.

Title Insurance – protection against lawsuits and claims tied to the chain of title on the subject property.

Truth in Lending - 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.
 

Underwater Mortgage – a mortgage whose balance exceeds the value of the property.  Also known as an “upside down” mortgage.

USDA loan – a mortgage insured by the USDA that allows borrowers to purchase homes in rural areas with nothing down.

VA Mortgage – a mortgage offered to veterans and their families that is guaranteed by the Veterans Administration.

Zero Down Mortgage – a home loan that doesn’t require a down payment.

Zestimate – the estimated market value of a piece of property based on Zillow’s algorithm.