One of the most important, and confusing, decisions that people make is buying a home and taking out a mortgage to pay for the house. Finding the house is only the first step in the process. The next step, finding a mortgage to pay for your home, is where things can get confusing. The terminology used in discussing mortgages can leave a first-time buyer frustrated.
Let’s take a look at some of terms you’ll have to be familiar with on your mortgage journey, and remember, if you need a helping hand, Preferred Lending Solutions is here to help.
The right of the mortgagee (lender) to demand the immediate repayment of the mortgage loan balance upon the default of the mortgagor (borrower), or by using the right vested in the due-on-sale clause.
Adjustable Rate Mortgage (ARM)
A mortgage in which the interest rate is adjusted periodically based on an index. Also called a variable rate mortgage.
For an adjustable rate mortgage, the time between changes in the interest rate charged. The most common adjustment intervals are one, three or five years.
Extinguishing the outstanding balance of a loan by making equal payments on a regular schedule (usually monthly). The payments are structured so that the borrower pays both interest and principal with each payment.
Annual Percentage Rate (APR)
The interest rate which reflects the cost of a mortgage as a yearly rate. This rate is usually higher than the stated loan rate for the mortgage because it includes points and other charges.
A loan that behaves like a fixed-rate mortgage for a set number of years (usually five or seven) and then must be paid off in full in a single “balloon” payment. Balloon loans are popular with those expecting to sell or refinance their property within a definite period of time.
Funds paid to the lender by the borrower or third party for the purpose of reducing the interest rate of the loan for a specified period of time.
A set percentage by which an ARM may adjust each pre-set period as described in the mortgage note. Caps are usually quoted as two numbers as in 2/6. The first number indicates how much a loan may change at each adjustment period while the second number indicates the percentage a loan may adjust over its lifetime. Loans like the 3/1 and 5/1 adjustable which have an initial fixed period are quoted with 3 numbers as in 3/2/6 which would mean that the first adjustment may be as much as 3%, subsequent adjustments are capped at 2% each, and the lifetime cap is 6%.
Certificate of Occupancy
Written authorization issued by a local municipal authority that permits occupancy of a newly constructed home.
Certificate of Reasonable Value (CRV)
An appraisal issued by the Veterans Administration showing the property’s current market value.
A written letter of agreement detailing the terms and conditions on which the mortgage company will lend money to finance a home.
A mortgage loan with an initial balance equal to or less than the maximum amount established by Fannie Mae and Freddie Mac.
A short term loan for funding the cost of construction. The lender advances funds to the builder as the work progresses.
A provision that makes the occurrence of one event dependent upon the completion of another. For example, the purchase of a home may be contingent on the seller repairing structural damages.
A mortgage neither insured by the FHA nor guaranteed by the VA.
The right of a borrower to convert an adjustable or balloon loan into a fixed rate loan.
The borrower’s failure to make payments on a loan. It may also be a breach of the terms of the note or deed of trust.
Money paid by a buyer from his own funds, as opposed to the portion of the purchase price which is financed by the lender.
Due on Sale Clause
A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the borrower sells the home.
The rights of an individual to use another property for a particular purpose (e.g., access to their own property).
A right due to an individual. The term, when used with VA insurance, refers to the loan amount that the VA will guarantee.
Equal Credit Opportunity Act (ECOA)
Federal law prohibiting lenders from discrimination in lending 1) by reason of race, color, religion, national origin, sex, marital status or age, 2) because any income is derived from public assistance, or 3) because the applicant has exercised any rights under the Consumer Protection Act.
Federal Home Loan Mortgage Corporation
A private corporation authorized by Congress which sells participation certificates secured by conventional mortgage loans. Also known as Freddie Mac.
Federal National Mortgage Association
A private, for profit, corporation created by Congress to support the secondary mortgage market. It purchases and sells residential mortgages insured by FHA and guaranteed by the VA as well as conventional mortgages. Also known as Fannie Mae.
A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans, they are generous enough to handle moderately-priced homes.
FHA Mortgage Insurance
FHA requires a fee (up to 1.50 percent of the loan amount) paid at closing to insure the loan. In addition, FHA mortgage insurance requires a monthly installment of .50 percent of the loan amount. The lower the down payment, the more years the insurance must be paid.
Fixed Rate Mortgage
A mortgage where the interest rate does not change for the life of the loan.
Between application and closing, a borrower may choose to “play the market” by electing to float the interest rate. Floating is essentially choosing not to lock the interest rate. Since it is the borrower’s responsibility to lock his or her rate before closing, choosing to float is considered risky and may result in a higher interest rate.
A mortgage that is guaranteed against default, such as a VA or FHA insured mortgage. Borrowers must pay an insurance premium in order to get a guaranteed mortgage.
Graduated Payment Mortgage (GPM)
A mortgage with monthly payments that are smaller at the beginning of the loan period and gradually increase by a specified amount for the first five or ten years, after which they become fixed. A GPM has a fixed interest rate and fixed loan period.
A mortgage that combines some attributes of a fixed rate mortgage with attributes of an adjustable rate mortgage (e.g., a loan that is fixed for 5 years but then becomes an ARM).
The ratio of the monthly housing payment to total gross monthly income. Also called Payment-to-Income Ratio or Front-End Ratio.
A published interest rate tied to an ARM loan’s interest rate. The index is not controlled by the lender. The index and the interest rate linked to it may increase or decrease.
A percentage of the amount of a loan paid for the use of money for a specified time.
A loan made during the construction of a building or a project. A permanent loan usually replaces this loan after completion.
A initial loan balance exceeding the maximum amount established by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.
A charge against a property whereby the property is made security for the payment of a debt such as a judgment or mortgage.
Life of Loan Cap
The maximum interest rate that can be charged during the life of the loan. Also called Lifetime Cap. This value is often expressed as an increment above the initial note rate. For example, an adjustable rate loan with an initial rate of 7.25% and a 6% lifetime cap will never adjust above a rate of 13.25% (7.25% + 6.0%).
The amount a lender adds to the quoted index rate for an adjustable rate loan to determine the new interest rate.
The result of artificially low monthly mortgage payments which do not cover all interest due to the lender. The deferred interest is added to the loan balance which may be higher than the original amount of the loan.
The fee imposed by a lender to cover processing expenses in connection with lending money. Usually a percentage of the original loan balance.
The sum of the principal, interest, taxes and insurance. Also called monthly housing expense.
Prepaid interest paid by the borrower to the lender at closing. A point is equal to 1 percent of the loan amount (e.g., 1.5 points on a $100,000 mortgage would cost the borrower $1,500). Generally, by paying more points at closing, the borrower reduces the interest rate of the loan and thus reduces future monthly payments.
To repay the remaining balance of a loan ahead of the regular schedule.
Lenders who impose prepayment penalties will charge borrowers a fee if they wish to repay part or all of their loan in advance of the regular schedule.
The process of establishing a borrower’s qualification for a loan of a particular amount based on income and expenses. Pre – qualification does not guarantee that the loan will be approved, but can be used to demonstrate financial capability to an agent or seller.
Private Mortgage Insurance (PMI)
Paid by a borrower to protect the lender in case of default. PMI is typically charged to the borrower when the Loan-to-Value Ratio is greater than 80%.
The ratio of the borrower’s fixed monthly expenses to his gross monthly income.
Money paid to the local authorities for recording a home sale, thereby making it part of the public records.
Obtaining a new mortgage loan on a property already owned (often to replace existing loans on the property).
The cancellation of a contract. It gives the homeowner three days to cancel a refinancing contract once it is signed if the transaction uses equity in the home as security.
A contract between a purchaser and a seller of real estate to convey title after certain conditions have been met.
A mortgage made subsequent to another mortgage and subordinate to the first one.
An agreement in which a seller provides financing needed by a buyer to purchase the seller’s home. The agreement often is reached when the buyer has insufficient funds for a down payment.
A document that gives evidence of an individual’s ownership of property. Documentary evidence of ownership is the title deed, which specifies in whom the legal estate is vested, and the history of ownership and transfers. Title can be acquired through purchase, inheritance, gift or foreclosure of a mortgage.
An insurance contract by which the title insurance company agrees to pay the insured a specific amount for any loss caused by defects of title to a specifically described parcel of real estate.
The decision whether to make a loan to a potential home buyer based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount.
A long-term, low or no down payment loan guaranteed by the Department of Veterans Affairs. Restricted to individuals qualified by military service or other entitlements.
A guarantee or protection provided to the purchaser regarding the condition of appliances and certain fixtures. New homes often have more extensive warranties covering not only fixtures and appliances but the overall structure as well.