| Mortgage terms It's not that difficult to know what kind of house to look for and
in what area. Answers to questions about your annual income, cash flow, debts and other
expenses also come easy. But when your financial institution starts talking about
different aspects of mortgage you will often find yourself in a place where you don't know
what kind of language those people are talking. That's why you may find this short course
in mortgage terminology very helpful.
Adjustable Rate Mortgage (ARM) is a loan
with an interest rate that changes to adjust to market conditions. Most ARMs have their
interest rates adjusted at specific intervals depending upon the mortgage contract.
Adjustment Index is the guide lenders use
to adjust or change ARM interest during the life of the mortgage. When the adjustment
period arrives, the change is made according to one of many widely published indices over
which the lender has no control. The specific index to which your ARM is tied will be
spelled out in the mortgage contract and will vary from lender to lender. Some lenders may
offer you a choice of indices.
Annual Cap is the limit on how high the
interest rate of an ARM can rise during a single year. Annual caps are specified in all of
the better ARM mortgage programs. Don't sign without one.
Annual Percentage Rate (APR) is the true
cost of a loan, including all financing charges and fees. The APR is expressed as an
annual percentage rate, as required by the Truth In Lending Act.
Amortization is the act of reducing the
amount owed on the loan. Amortization can be made either in one or more lumps sums, as
well as in periodic installments.
Appraisal Value is an estimate of a
property's worth, usually based on recent sales of comparable properties nearby.
Appraisals, done by certified professionals, are used by lenders to verify a home's value
and to justify a lender's mortgage commitment for that home.
Appreciation refers to increases in a
property's value, either through improving market conditions or physical improvements made
by the owner.
Balloon Mortgages look and act like
fixed-rate mortgages, except that the loan is usually due in three, five or ten years.
Then, you must either refinance, or repay the entire outstanding balance in one lump sum.
Buy down is the act of buying a lower interest rate
by paying more points at the closing.
Conventional Mortgage is a loan for $214,600 or
less, that meets the standards set by Fannie Mae and Freddie Mac, the largest purchasers
of home mortgages on the secondary market.
Convertible Mortgage is an ARM that has the option
of being converted to a fixed-rate mortgage at specific times during the life of the loan.
Fannie Mae refers to the Federal National Mortgage
Association, a federally chartered, publicly traded corporation that buys mortgage loans
from primary lenders and mortgage bankers, then packages them for sale on the secondary
market. It sets the standard for credit requirements and maximum loan sizes in the
industry.
FHA Loans are issued by FHA-approved lenders. The
FHA insures its loans so borrowers can get them with only a three to five percent down
payment. Maximum loans are set by the FHA on a country-by-country basis to allow for
differences in area housing prices.
Fixed-Rate Mortgages are self-amortizing loans with
constant interest rates. Fixed-rate mortgages are usually for terms of 15 or 30 years.
Freddie Mac refers to the Federal Home Loan
Mortgage Corporation, another federally chartered, publicly traded organization that
purchases mortgage loans.
Interest Rate is what lenders charge borrowers for
renting their money, expressed as an annual percentage of the amount borrowed, before
factoring in financing charges and fees.
Initial Interest Rate or Teaser Rate is the
interest rate charged on an ARM until the first adjustment is made. Most ARM programs
offer initial interest rates well below fixed-rate mortgages.
Jumbo Mortgages are loans for more than $214,600.
The interest rate is usually a quarter of a percentage point higher than on conventional
loans.
Lifetime Cap is the same as an annual cap, except
the limit is on how high the interest rate can rise over the entire life of the mortgage.
Loan Commitment is a promise by a lender to provide
a specified amount of money (the mortgage) in order to close on home. Loan commitments
also will specify the mortgage's interest rate and time frame, usually 60 days, within
which the loan must be used.
Loan Servicing refers to handling billing,
collecting payment and paperwork associated with on-going mortgages.
Loan-To-Value Ratio (LTV) is the proportional
relationship of a mortgage loan to the value of a home, expressed as a percentage. For
instance: A $100,000 home purchased with a $75,00 mortgage would have an LTV of 75
percent.
Margin is an additional charge added to an ARM
index when the adjustment period arrives.
Mortgage Brokers originate loans that are founded
by primary lenders. Getting your loan through a mortgage broker is riskier than through a
primary lender or mortgage banker, because in times of tight money, mortgage brokers are
the first lenders to have difficulty fulfilling their mortgage commitments.
Mortgage Term is the length of time specified in
the contract for repaying the loan, sometimes called the contract life of a loan.
Negative Amortization is associated only with ARMs
and can occur when a scheduled mortgage payment is too small to pay interest charges on
the loan. In such cases, the cash shortfall is added to your mortgage principal, thus
making your outstanding balance grow.
Points, or Loan Origination Fees, are the up-front
cash paid to lenders at closing as an inducement for making the loan. Each point equals
one percent of the loan amount. Typically, lenders charge one to three points when making
mortgages. Sometimes buyers will opt for higher points in exchange for lower interest
rates.
Primary Lenders generally include banks, S&Ls
and credit unions. Primary lenders make loans to consumers with their own cash and service
the mortgages they issue.
Retire (a loan). To pay off a loan. Mortgages can
be retired either at the end of their term or sooner. However, in some states early
retirement of a loan may carry a pre-payment penalty.
Self-Amortizing Mortgage is a loan with regular
monthly payments that are sufficient to cover interest carrying charges plus the principal
necessary to repay the entire loan by the end of the contracted mortgage terms.
VA Mortgages are guaranteed by the Department of
Veterans Affairs for honorably discharged veterans. Current guidelines allow veterans to
borrow up to $184,000 with no down payment.
|
