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What Basic Terms Do I Need To Know About Home Financing?
The mortgage industry is continuously changing - it's a challenge just to keep up. New regulations, government programs and terms are always being created. Therefore, the first step in understanding the refinancing process is to learn the language!
ADJUSTABLE RATE MORTGAGE (ARM) - A loan that allows the lender to adjust the borrower's interest rate and payments at prescribed times and sometimes with prescribed limits. Lower starting interest rates are customary.
AMORTIZED LOAN - A loan which is paid off in equal installments during its term.
ANNUAL PERCENTAGE RATE (APR) - It is a reflection of the actual Note Rate and associated costs of the loan transaction.
APPRAISAL - A report made by a licensed expert setting forth an opinion of condition and value. The term also refers to the process by which the estimate is obtained.
APPRAISED VALUE - An estimation of property value made by a qualified expert.
APPRECIATION - An increase in the value of a property. Appreciation may be the result of an increased demand for property, any improvements or additions made, improvements to the neighborhood, etc.
BALLOON MORTGAGE - A mortgage with periodic installments of principal and interest that, at the end of such a period, does not fully pay off a loan. Payment of the loan balance required in a lump sum at a specified date, usually at the end of the term of such periodic installments.
CLOSING - The process that brings a loan into legal existence, including the signing of all loan documents, their delivery to the appropriate parties, and the disbursing of at least some of the loan funds.
CLOSING COSTS - These are fees paid to all service providers as part of the transaction and include expenses such as lender fees, appraisal, attorney fees, title insurance, survey, recording fees, termite inspection, etc. All of these services are provided by independent professionals. Depending on the size of your loan and the configuration of your loan program, closing costs are usually 1 1/2% to 3 % of your loan amount.
COMPARABLES - Properties used in an appraisal report that are substantially equivalent to the subject property.
CONVENTIONAL LOAN - A non-Government loan of up to $417,000. Loan programs include no down payment (100% financing), 3% down payment, or more typically, at least 5% down payment. This type of loan is subject to the qualifying guidelines set forth by FNMA (Fannie Mae) or FHLMC (Freddy Mac).
CREDIT HISTORY - This is a "snap-shot" of your past and present debt, current available credit, and a rating of your debt repayment history. Credit history is a key component of loan approval and can dictate both the type of loan program and interest rate a borrow can qualify for. A credit score, called a “FICO“ score is generated by each credit repository.
CREDIT REPORT - A document completed by a credit-reporting agency providing information about the buyer's credit cards, previous mortgage history, bank loans and public records dealing with financial matters including bankruptcies, foreclosures, tax liens, collections and charge-offs.
DEED - The formal written document that transfers the rights of ownership and possession of a property (that is, the title) from the seller to the buyer.
DISCOUNT POINT - A unit of measurement used for various loan charges; one point equals one percent of the loan amount.
DOWN PAYMENT - The difference between the loan amount and the sales price of a home. This is measured in a percentage; for example, a 3% down payment on a $200,000 home would be $6,000.
EQUITY - The owner's interest, or the amount of cash the owner has, realized, paid in or invested in real estate.
ESCROW PAYMENT - The portion of a borrower's monthly payment that is set aside by the loan servicing company in an account to pay the taxes, hazard insurance, mortgage insurance, ground rents and other special items as they come due.
FHA LOAN - A loan that is insured by the Federal Housing Authority. This type of loan is geared toward providing home loans for moderate to low income families and is subject to the qualifying guidelines set forth by the Federal Housing Authority. Current limit in Tucson is $239,850.
FIXED-RATE MORTGAGE - The type of loan where the interest will not change for the entire term of the loan.
GOOD FAITH ESTIMATE - Provides a breakdown of the estimated closing costs and prepaid items.
HOME EQUITY LOAN - A loan under which a property owner uses his or her residence as collateral and can then draw funds up to a prearranged amount against the property. All Home Equity Loans are 2nd mortgages.
INTEREST RATE - The percentage of interest charged on the amount of money borrowed. This rate will vary according to the type of mortgage program for example, 30-year fixed, 15-year fixed, 3 year adjustable, etc.
LOAN-TO-VALUE RATIO (LTV) - The ratio, expressed as a percentage, of the loan amount to the value or selling price of the property (denominator). Usually, the higher the percentage, the greater the interest charged.
MORTGAGE BROKER - An entity licensed to originate mortgage loans for 3rd party investors. The investor typically supplies the funds and service to complete the loan. Mortgage Brokers do not service the monthly payment handling for any loans.
ORIGINATION FEE - The fee that the lender charges the borrower to cover the cost of issuing a loan commitment. It pays for compensation of the Loan Officer. The fee is usually computed as a percentage of the mortgage loan.
POINTS - An amount equal to one percent of the loan amount. Discount points are typically charged if a borrower wants to reduce or “buy-down“ the Note Rate on a loan from a current Market rate.
PREPAID ITEMS - These items are not costs or fees, rather they cover items required that a borrower would need to pay even if there was not a loan on the property. The items include property taxes and homeowners insurance. Property taxes are set by the appropriate government taxing authority and, unfortunately, are not negotiable. Depending on the regulatory agency, (FHA, Fannie Mae, etc.) you will be required to pre-pay anywhere from 2 to 8 months of property taxes at closing. Premiums for homeowner's insurance are set by the insurance company you select, and you are required to pay your first year homeowners' insurance plus two additional months at closing. Prepaid items usually account for 1% of your loan amount.
PRIVATE MORTGAGE INSURANCE - This insurance is required on most first mortgage loans that represent more than 80% of the value of a property (80% Loan-to-Value or LTV). Private Mortgage Insurance protects the lender in the event that you default on your mortgage payment.
TITLE - The evidence of the right to or ownership in property. In the case of real estate, the documentary evidence of ownership is the title deed, which specifies the legal name for property vesting and the history of ownership and transfers. Title may be acquired through purchase, inheritance, devise, gift or through the foreclosure of a mortgage.
TITLE INSURANCE - An insurance policy which protects the insured (purchaser or lender) against loss arising from defects in title.
UNDERWRITING - The process by which a loan package is approving or denying based upon an evaluation of the property and the applicant's creditworthiness and ability to repay the loan. The underwriter analyzes the risks involved and states what, if any, requirements need to be met.
VA HOME LOAN - A loan that is insured by the Department of Veteran's Affairs. This type of loan is available only to veterans and their spouse and is subject to the qualifying guidelines set forth by the Department of Veteran's Affairs. Maximum loan is $417,000.
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