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Mortgage Glossary

 

Adjustable Rate Mortgage (ARM)

A home loan with an interest rate that can change, depending on federal interest rates. The interest rate usually has a cap to make sure it doesn’t go up too far, no matter what happens to the economy.

 

Annual Percentage Rate (APR)

An annual calculation that includes the interest rate quoted by your mortgage company plus additional home loan costs such as origination fees and points.

 

Bimonthly Mortgage

A mortgage in which the borrower makes a payment twice a month, generally on the 1st and the 15th.

 

Biweekly Mortgage

A mortgage in which the borrower makes half of their monthly mortgage payment every two weeks.  This equates to 13 payments in a 12-month period, accelerating mortgage payoff and saving thousands of dollars in interest.

 

Closing Costs

All costs of the home-buying process (ie. lawyers fees, taxes, title insurance, escrow payments) that aren’t covered in the purchase price of the house, and are paid upon closing.  These are common fees during the homebuying process; your lender can provide you with a loan estimate of what these will be.

 

Debt-to-Income Ratio

The ratio expressed as a percentage which results when a borrower’s monthly payment obligation on long term debts is divided by his or her gross monthly income.

 

Equity

The amount of a property’s value that is owned by the property owner, due to home improvements, market growth, and paying down the principal.

 

Escrow

A third-party account that holds all the money and documents that make up a property transfer until the sale is complete.  This protects both parties during a sale.

 

Fixed-Rate Mortgage

A home loan with a solid, unchanging interest rate. If you get one of these, you may want to refinance later if interest rates go down, but you won’t have to worry about them going up.

 

Gift Letter

A letter documenting a monetary gift given to a homebuyer.  The letter outlines that the money was a gift without any obligation to repay.

 

Good Faith Estimate (GFE)

An itemized list of settlement costs that you must pay to close your loan.  This list is required, and will be provided, by your lender within 3 business days of the application.

 

HELOC (Home Equity Line of Credit)

A loan given by the lender using the homeowner’s property as collateral that gives the borrower a revolving credit line for a specified time (usually 10 years), followed by a repayment period (usually 20 years).

 

Homeowner’s Insurance

A form of insurance that protects your property against theft, liability, and most natural disasters.  Most lenders require a certain amount of homeowner’s insurance on the property.

 

Interest Rate

A percentage fee you pay to borrow money for a specified period.

 

Investment Property

A property purchased to generate income, as opposed to a primary residence.

 

Jumbo Loans

Loans that exceed the dollar amount set by Freddie Mac and Fannie Mae.  Because jumbo loans cannot be funded by these two agencies they usually carry a higher interest rate.

 

Liabilities

All the money you owe, such as auto loans, student loans, and credit card debt.  Liabilities include long-term and short-term debt.

 

Loan-to-Value Ratio (LVR)

This term refers to the amount of money you are financing in relationship to your new home’s value.  For example, if you put $10,000 down on a property worth $100,000 (financing the remaining $90,000), your LVR is 90%.

 

Lock

A mortgage rate quoted from your lender that will be guaranteed for a certain number of days from your application date.

 

Margin

All The amount between the interest rate and ARM (adjustable rate mortgage) interest rate after the initial rate period ends.

 

Maturity Date

The date on which the balance of the loan must be paid in full.

 

Mortgagor

The borrower on the mortgage loan.

 

Note

A lender’s legal claim to a property used as collateral, which allows the lender to sell the collateral if the borrower defaults.

 

Notice of Default

A foreclosure alternative in which the lender allows the borrow to sell the property at an agreed-upon, discounted price.

 

Origination Fee

A fee paid to the lender for processing the loan application, paid as a percentage of the principal amount of the loan.

 

Owner Financing

A financing scenario in which the current owner provides all or part of the financing to the buyer.

Prepayment Penalty

A fee incurred for paying off your mortgage early; not all home loans have these.

 

Processing Fee

A fee which covers the administrative costs of a loan.

 

Private Mortgage Insurance

A mortgage insurance you may be required to pay that protects the lender if you were to default on your mortgage payments. The lower your credit and down payment are, the more likely you will be to pay for this type of insurance.

 

Qualifying Ratios

Calculations used to determine whether a borrower qualifies for the mortgage.  Qualifying ratios used include debt-to-income and housing expense-to-income.

 

Rate Lock

An agreement that locks your rate for a certain period of time.  If escrow extends beyond the agreed date, the rate is subject to current market fluctuations.

 

Refinance

A replacement of your current mortgage loan with a new loan under different terms.

 

Reserves

Money the borrow would have on hand after closing (meaning separate from their down payment).  Although not always required, most lenders will want to see a minimum two-month reserve in your account.

 

Security

A lender’s legal claim to a property used as collateral, which allows the lender to sell the collateral if the borrower defaults.

 

Short Sale

A foreclosure alternative in which the lender allows the borrow to sell the property at an agreed-upon, discounted price.

 

Title Company

A third party company that handles manages the closing of your home, ensuring ownership rights and checking for liens on the property .

 

Underwriting

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.

 

Verification of Employment

A document signed by the borrower’s employer, used to verify position and salary.

 

W-2

Wage and tax statement provided by your employer annually, detailing your income along with taxes withheld from your income during that tax year.  Your W-2 is provided to the IRS, along with your tax return.

 

Walk-Through

A final inspection on your property performed before closing, ensuring the property is in the same condition as at the time of contract. 

 

Year-End Statement

A report prepared by the lender that shows how much was paid in interest and taxes during the year, as well as the remaining loan balance at the end of the year.

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