Know your mortgage buzz words

Know your mortgage buzz words

Know your mortgage buzz words

Know your mortgage buzz words

Taking out a mortgage might seem intimidating, but it doesn’t have to be. There may be some words you’ve never heard before, and that’s understandable. Whether you’re a first-time home buyer or just need a refresher, here are the top terms you should know to navigate the mortgage process like a pro.

A

Adjustable-Rate Mortgage (ARM): A loan with an interest rate that varies depending on how market rates move. This kind of loan entails an introductory period of fixed interest, which can last for up to 10 years. After that, the interest rate will follow market interest rates. ARMs have caps that limit the total amount that the interest can rise or fall over the course of the loan.

Amortization: The gradual repayment of a mortgage loan by installments.

Annual Percentage Rate (APR): The actual cost of a mortgage stated as a yearly rate including interest, mortgage insurance, and closing costs required by the lender and title company.

Appraised Value: An opinion of a property’s fair market value based on an appraiser’s knowledge, experience, and analysis of the property.

Appreciation: An increase in the value of a property due to changes in market conditions or other causes. The opposite of “depreciation.”

Assessments: Fees charged for the general upkeep of common areas, along with amenities, in condominiums and townhomes. They are not bundled into the mortgage and must be directly paid to the homeowner’s association.

C

Closing Costs: Expenses (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property. A buyer’s closing costs typically include fees for application, processing, underwriting, flood certification, transfer taxes (where applicable), title company, interest, tax and insurance escrows, and attorney.

Closing Disclosure (CD): A document that explains the costs of the transaction. This document must be given to the buyer three days prior to closing which ensures no surprises at closing.

Conventional Loan: Loans sold to government-sponsored enterprises like Fannie Mae and Freddie Mac. Conventional loans are not insured by any government program such as FHA, VA, or USDA. Conventional loans are the most common type of mortgage.

D

Debt-to-Income (DTI) Ratio: A number equal to a borrower’s total fixed, recurring monthly debts divided by total monthly gross household income. Mortgage lenders assess a borrower’s DTI when considering him or her for a loan to ensure payments can be made.

Department of Veterans Affairs (VA): VA loans are guaranteed by the U.S. Department of Veterans Affairs. VA loans are offered to eligible American veterans or their surviving spouses.

Depreciation: A decrease in the value of a property due to changes in market conditions or other causes. The opposite of “appreciation.”

Down Payment: The first payment made on a mortgage loan, which is usually a percentage of the loan value. For example, a 20% down payment on a $100,000 loan will require $20,000 at closing. Most loan types require a down payment. Though many people believe a 20% down payment is required to buy a home, this actually isn’t true.

E

Earnest Money: Money given to show seriousness about a home purchase, generally 3%-5% of the home’s cost. The money goes into an escrow account until financing is arranged, at which point it gets credited to the purchase price. If the sale doesn’t go through, the seller generally keeps the money.

Equity: The difference between what is owed on a home loan and its market value. Equity builds as the mortgage is paid down. It might also grow if home values in the region noticeably change. This value can be borrowed against over time in the form of a home equity loan, a home equity line of credit, or a reverse mortgage.

Escrow Account: An account into which deposits for real estate taxes and insurance (mortgage insurance, hazard insurance, and flood insurance as applicable) are made as part of the monthly mortgage payment. The mortgage servicer pays the taxes and insurance out of the account when due. The buyer receives an annual escrow analysis stating all funds paid into and out of the account.

F

Federal Housing Administration (FHA): A government agency that provides mortgage insurance on loans made by FHA-approved lenders. FHA loans are designed for borrowers who are unable to make a large down payment.

Fixed-Rate Mortgage: A loan with the same interest rate throughout its entire term. For example, a borrower with a 4% fixed rate on a 15-year loan will pay 4% interest every month for the entire 15-year term. Homeowners who choose a fixed-rate term often believe that rates will rise over the course of their loan and want the stability and predictability this type of loan provides.

H

Hazard Insurance: Also known as Homeowner’s Insurance, this insurance protects the borrower against any financial losses that might result due to a fire, flood or other “hazards.”

Home Inspection: An examination of a home where an inspector will test things such as the heating and cooling system, light switches, and appliances. They will then give the potential buyer a list of everything that needs to be repaired or replaced in the home. Not to be confused with a home appraisal, which is a estimate of how much a home is worth.

I

Interest: The cost of borrowing the principal, calculated as a percentage rate of the full loan. The rate may be fixed or adjustable depending on the type of loan.

Interest Rate Lock: A written agreement in which the lender guarantees a specified interest rate if a mortgage goes to closing within a set period of time.

L

Loan Application: A detailed form designed to provide information to originate a loan. The loan application form requests information such as bank account balances, employment, and income information and liabilities.

Loan Estimate (LE): A simpler way for borrowers to understand the total cost of a mortgage. Lenders have three business days upon receiving a complete application, to provide the loan estimate to applicants. It explains the specified loan amount, interest rate (including the APR), estimated monthly payments, estimated assessments, insurance and taxes, and the estimated cash needed at closing.

M

Mortgage Insurance: Protection for the lender in the case of default, generally required for borrowers who offer a down payment less than 20%. For conventional (non-government) mortgages, coverage is provided by private insurers and is known as private mortgage insurance (PMI). Borrowers can request that the PMI be canceled after 20% home equity has been reached. Then the servicer will evaluate the request.

P

Pre-Approval: A written offer for a specific loan amount from a mortgage lender following a thorough assessment of a buyer’s income, debts, anticipated down payment, credit score, and job history. Not to be confused with pre-qualification, which is more simply an estimate of what a borrower might be able to acquire.

Pre-Qualification: An estimate of how much a borrower might be able to acquire in a home loan based on basic information, such as income, debts, and anticipated down payment. Not to be confused with pre-approval, where a lender has considered a mortgage application more thoroughly, and has provided a written offer.

T

Term: The number of years a borrower pays on a loan before becoming the sole homeowner. For example, a mortgage loan with a 15-year term means a borrower will make monthly payments for 15 years before the loan matures. The most common mortgage terms are 15 and 30 years, but some lenders offer terms as short as 8 years.

Title: Written, legal proof of homeownership. A title includes a physical description of the property, the names of anyone who owns the property, and any liens on the home. When someone says that they’re “on the title” of a home, it means that they have some kind of legal ownership of the property.