Common Mortgage Industry Terms
The decisions you make on your mortgage will have financial ramifications for years to come, so it’s important to know what you’re doing. Below we’ve outlined some of the more common terms you may hear or run into when working with your mortgage broker, loan originator or real estate agent. If you still have questions, our home loan experts are ready to help and only a phone call away!
ADJUSTABLE RATE MORTGAGE (ARM)
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.
Loan payment divided into equal periodic payments calculated to pay off the debt at the end of a fixed period including accrued interest on the outstanding balance.
The length of time required to amortize the mortgage loan expressed as a number of months. For example 360 months is the amortization term for a 30-year fixed rate mortgage.
ANNUAL PERCENTAGE RATE (APR)
The rate of interest that will be paid back to the mortgage lender. The rate can either be a fixed rate or adjustable rate.
An 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.
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.
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 riskier the loan is for the lender.
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. This escrow account is maintained by the lender who is responsible for sending the tax bills on a regular basis.
FIXED RATE MORTGAGE
This 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 up to 40 years.
GOOD FAITH ESTIMATE
This is 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 the loan.
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.
The Loan-to-Value (LTV) ratio is a typical calculation. 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.
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.
This 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 (PMI)
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.
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.
TRUTH IN LENDING
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.
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