Mortgage Glossary

Mortgage Glossary

Here are some commonly used mortgage terms and their meanings.

401k

- A tax-deferred savings account made available by an employer which allows employees to set aside income for retirement. In some cases, the employer may match contributions to a certain limit.

Adjustable rate mortgages (ARMs)

- A mortgage with a rate of interest that may adjust based on various indexes, such as the Treasury Bill rate or the prime rate.

Administration fee

- A fee imposed to cover the administrative portion of settling a loan.

Affordability calculator

- One of many calculators on the Internet which measures how much home a person can afford.

Agent fee(s)

- A fee imposed by the real estate agent for providing the buyer with realty services.

Amortization

- The process of regular repayments at scheduled intervals to reduce the principal and repay interest as it is due.

Annual percentage rate (APR)

-The cost of a loan expressed as a yearly rate, which includes the interest rate, points, broker fees, insurance, and any other related fees a borrower is required to pay.

Application fee

- A fee charged by the lender to cover the cost of processing a loan request and checking the borrower's credit.

Appraisal

- A documented estimate of a property's market value by a qualified appraiser.

Appraisal fee

- The fee an appraiser charges to assess the property value of a home.

Appreciation

- The increase in value of a home over time.

Balloon

- A final lump sum mortgage payment due in full after a set period of time.

Better Business Bureau (BBB)

- A national member organization that addresses marketplace problems through voluntary self-regulation and consumer education.

Borrower(s)

A person who borrows money from a lender.

Broker(s)

- The intermediary between borrowers and lenders used for loan origination, and earns a commission for doing so. They do not originate or service the mortgage, but they may negotiate with lenders to find the best possible financing for the borrower.

Buyer(s) agent

- The real estate agent who represents the buyer in a sales transaction and owes fiduciary duties to the buyer.

Carry-back mortgage

- A financing arrangement where the seller holds a second trust deed or mortgage on the property to allow the buyer to buy the property.

Closing costs

- Fees and expenses (separate and in addition to the purchase price of the property) incurred in the process of transferring ownership of property. May also be called settlement costs.

Commission

- The amount a real estate broker earns (usually 3-6% of the sales price of a home) for selling a home.

Conforming

- A loan that conforms to the standard rules for purchase by Freddie Mac or Fannie Mae.

Constant Maturity Treasury (CMT)

- Weekly average of quotes on Treasury securities with same time remaining time to maturity that is frequently used as mortgages index.

Construction cost(s)

- The amount it costs to finance the construction of a property.

Conversion fee

- The fee charged to convert an adjustable rate mortgage to a fixed-rate loan.

Credit history

- A borrower's record of repaying loans and use of revolving credit. Used by lenders to assess applicant's creditworthiness.

Credit report

- A report issued by a credit reporting agency containing a person's credit history, public records (including bankruptcy, tax liens, etc) and recent inquiries.

Credit score(s)

See FICO score.

Credit union

- A not-for-profit cooperative financial institution that is owned and operated by its members. Federally chartered credit unions are regulated and insured by the National Credit Union Administration.

Debt ratio(s)

- A number that measures how much of an individual's income is solely devoted to repaying debt. Frequently considered by lenders when evaluating a person's creditworthiness. Calculated by dividing monthly debts owed by monthly income. Also referred to as debt-to-income ratio.

Discount broker

- A broker who discount his/her commission fees to buy or sell your property.

Document preparation

- The process of preparing closing documents for a mortgage.

Down payment

- A portion of the purchase price paid in cash up front, reducing the total among of the loan.

Equity

- The current market value of a property minus what is owed.

Escrow

- An account held by a lender into which a homeowner pays for taxes and insurance.

Escrow agent

- The person or company which handles the distribution of escrow funds.

FICO Score

- A credit score developed by the Fair Issac Corporation used to determine a borrower's level of risk.

Fannie Mae (FNMA)

- The Federal National Mortgage Association is a public company that operates under a federal charter. As the nation's largest source of financing for home mortgages, Fannie Mae does not lend money directly to consumers, but instead works to ensure that mortgage funds are available and affordable, by purchasing mortgage loans from institutions that lend directly to consumers.

Federal Housing Administration (FHA)

- The Federal Housing Administration is a United States government agency which insures loans made by approved lenders to qualified borrowers, in accordance with its regulations.

Finance charge(s)

- The cost of credit, including interest, paid by a borrower for a loan. In accordance with the Truth in Lending Act, all finance charges must be disclosed to the borrower in advance.

Fixed rate loan

- A mortgage with a constant rate of interest over the life of the loan.

Flat fee

- A set management fee which does not change or fluctuate.

Flood certificate

- Insurance coverage for homes that are in known flood areas.

Freddie Mac

- The Federal Home Loan Mortgage Corporation, also known as Freddie Mac, is a congressionally chartered institution that buys mortgages from lenders and resells them as securities on the secondary mortgage market.

Government loan

- A mortgage that is insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA). Mortgages that are not government loans are classified as conventional loans.

Hazard insurance

- Property insurance covering a borrower's home against losses from fire, certain natural disasters, vandalism, and malicious mischief. Mortgage lenders require hazard insurance coverage before closing a loan. Typically maintained through regular mortgage payments.

Home builder(s)

- A construction company or general contractor who builds homes.

Home improvement

- Any interior or exterior projects which improve the overall appearance of an existing home.

Homeowner's association fees

- Fees paid by homeowners who live in a common property development and share amenities like grounds maintenance, swimming pool upkeep, use of the community room, etc.

Index

- A published cost of money measurement that lenders use to calculate the rate on a mortgage (e.g., T-bill, LIBOR, CMT.)

Insurance

- Coverage against unforeseen property losses in exchange for premiums paid.

Interest rate

- A rate, frequently expressed as a annual percentage, that is charged or paid to borrow money.

Lease

- An agreement which specifies the terms for occupying a property.

Lease option

- An agreement which allows a borrower to purchase a property which is being leased from the lender at a predetermined price.

Lender(s)

- An individual or firm that extends money to a borrower with the expectation of being repaid, typically with interest.

Lien(s)

- A legal claim against a property that must be paid off when the property is sold before the title transfer can occur.

Lifetime cap

- The maximum interest rate on an adjustable rate mortgage that may be charged at any time over the life of the mortgage.

Loan-to-value (LTV) ratio

- The amount of a mortgage loan divided by the appraised value or sales price.

Loan officer

- The person at a lending institution who solicits loans, acts as the representative for the lending institution, and represents the borrower at the lending institution.

Lock(ed)-in

- A quoted rate guaranteed by a lender for a specified period of time even if rates go up or down during the lock-in period.

Interbank Offering Rate (LIBOR)

- An index used to determine interest rate changes for certain ARM plans, based on the average interest rate international banks charge each other for loans.

Low-interest

- A special rate which may be lower than the national average and for a specified period of time.

Margin

- The difference between the interest rate and the index on an adjustable rate mortgage.

Market price

- The price a property would be worth on the open market.

Mortgage

- A loan to finance a real estate purchase, typically with regular scheduled payments and specific interest rates. A lien on the property is typically used as collateral for the loan.

Mortgage broker(s)

- The intermediary between borrowers and lenders used for loan origination, and earns a commission for doing so. They do not originate or service the mortgage, but they may negotiate with lenders to find the best possible financing for the borrower.

Mortgage lender

- A lender who specializes in mortgages.

Mortgage payment

- The monthly payment amount owed to a lender which covers the principal and interest on a property.

Multiple Listing Service (MLS)

- A nationwide database of properties available for sale used by real estate agents.

National Board of Realtors

- A membership group for realtors also known as the National Association of Realtors, or NAR.

Non-conforming

- A loan which does not conform to the guidelines for mortgage backed securities that are purchased by Freddie Mac and Fannie Mae.

Origination fee

- A fee charged by a lender to the borrower for processing a loan application. Frequently expressed as a percentage of the total mortgage amount.

Pest inspection

- An inspection required by a lending or government institution prior to lending money to a borrower to insure that a property is free from structural pest damage and decay.

Point(s)

- An upfront fee that a lender may charge a borrower for originating a loan. One point is equal to one percent of the loan amount.

Pre-approval

- A process by which a borrower is certified by a specific mortgage lender as being qualified and worthy of a certain type of loan with specific terms up to a specified amount. Actual loan closing will depend on the suitability and value of the collateral property, which is unspecified at the time of pre-approval.

Prepayment penalty

- A fee paid to a lender for the privilege of paying off a loan prior to maturity. Prepayment penalties are prohibited in many states and by Fannie Mae and Freddie Mac.

Prequalify

- A lender's opinion of how much a borrower may qualify for without filling out an application.

Principal and interest

- The actual mortgage amount and interest paid back to the lender in the form of monthly payments.

Principal, Interest, Taxes and Insurance (PITI)

- A term used by lenders or brokers to provide a total monthly payment which includes Principal, Interest, Taxes, and Insurance.

Private Mortgage Insurance (PMI)

- Insurance that is provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults on a mortgage loan.

Processing fee

- A fee charged by the lender for the work required to process a loan.

Property maintenance

- The act of keeping a property presentable and livable.

Property tax(es)

- The tax paid on a property based on its assessed value.

Realtor

- A member of the National Association of Realtors (NAR) who must follow a strict code of ethics and receive ongoing training from the NAR.

Real estate agent

- A licensed salesperson working for a real estate broker, who receives a portion of the sale price of a sold property as commission.

Recurring debt

- A debt obligation which appears month-to-month until the balance is paid in full.

Refinance

- Paying off an existing loan with the proceeds from a new one, usually of the same size and using the same property as collateral.

Recording fee

- A fee that is charged as part of the closing cost to record a home sale as a matter of public record.

Remaining balance

- The amount of principal left unpaid on a mortgage loan.

Rural Housing Service (RHS)

- An agency of the U.S. Department of Agriculture that provides financing to farmers and qualified borrowers who buy property in rural areas and are unable to obtain loans elsewhere.

Sales agent

- The agent who handles and shows the property to the buyer.

Sales agreement

- The contract signed by the lender and buyer specifying the terms of the sale.

Secondary market

- The market where mortgages are bought and sold by investors.

Seller

- The person who is listing a property for sale.

Settlement cost(s)

- All expenses related to transferring home ownership from the seller to the buyer. Also referred to as closing costs.

State Board of Realtors

- A membership group by state which belongs to the National Board of Realtors.

Sub-prime

- A class of mortgage loan that is offered to individuals with less than perfect credit.

Tax savings

- The amount a borrower can save by writing off the interest on a mortgage loan.

Teaser rate

- A special introductory rate on an adjustable rate mortgage which is below current market rates to entice borrowers.

Title

- The deed to a property.

Title company

- A company that assures that the title to the property is clear and free from liens.

Title examination

- The review of a property's title by the title company against public records.

Title insurance

- Insurance which protects a lender or buyer against property disputes.

Treasury bill (T-bill)

- Securities auctioned by the U.S. Government to help pay off its debt obligations.

Underwriting

- The process a lender uses to determine risk and whether or not to extend a loan to a borrower.

Zero-down

- When a lender requires no money for a down payment from a borrower.

Zoning restrictions

The rules and regulations used by municipalities which control the use of lands and buildings.

Copyright 2009, Informa Research Services, Inc. ("Informa"). While all attempts have been made to provide effective, verifiable information in this article, neither the author nor Informa assumes any responsibility for errors, inaccuracies, or omissions. You should always seek the guidance of a licensed professional before making any major financial decisions.

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Mortgage Prequalification versus Mortgage Preapproval

Mortgage Prequalification versus Mortgage Preapproval

What's the difference between mortgage prequalification and mortgage preapproval? Which one is better?

Pre-qualification is preferable to pre-approved. Pre-qualification means that a lender has assessed and verified your income, assets, current debts, and credit score, and determined your ability to close the loan, your ability to re-pay the loan, and the size of loan they will lend to you. A pre-approval is a less rigorous review of your financial state than a pre-qualification; while a lender will assess your income and credit score, limited verification steps are normally taken.

In either case, your lender will provide you with a letter that you may share with your offer contract. Typically a pre-qualification letter can be completed in a matter of hours, although some lenders may take longer.

How Does Getting Pre-Qualified Benefit You?

· You will be able to shop with the confidence of knowing your exact price range.

· You can identify credit problems that can be addressed early in the lending process.

· You will typically have more negotiating power, as some sellers see more strength in offers from pre-qualified buyers.

· If you are self-employed or a commission-based buyer, pre-qualification can demonstrate financial backing if your income fluctuates more than those of salaried buyers.

· Pre-qualification gives first-time homebuyers the advantage of equalizing their offer with similar offers made by previous homeowners.

Other Pre-Qualification Facts?

· Pre-qualification is offered by most lenders, including at no cost.

· The pre-qualification process is not comprehensive and therefore is not guaranteed, nor is it considered any type of loan commitment. It simply shows that you’ve approached a lender who was serious about helping you determine what you can afford and will walk you through the process.

 

Why you should maintain a good FICO score

Derived from your credit history report, credit scores are based on points you receive for being a good borrower. The most common scoring system used for mortgage approvals is done by the Fair Issac Corporation (FICO), which accesses the three main credit reporting bureaus (Equifax, TransUnion, and Experian.)

Credit scores can range from a low of 300 points to a high of 850. People with average credit usually score around 620, good credit at 660, and excellent credit above 740. People with higher credit scores more easily obtain mortgage loans and also are able to secure lower interest rates vs. those with lower scores.

Example

Let’s imagine a 30 year fixed mortgage of $300,000. Someone with a credit score of 740 or higher could get a loan at a 4.125% interest rate, and a monthly payment of $1454. Another person with a credit score of 660, however, would get a loan with a higher interest rate of 4.625% and a monthly payment of $1542, a monthly difference of $88 (or annual difference of $1056). Over the life of the loan, this person would pay $31,849 more in interest as compared to the person with a 740 credit score. Another person with a credit score of 620 or below would have an even higher rate and payment, if they were even able to get a mortgage loan.

How to get the best rate

A good strategy for securing the best rate would be to clean-up your credit report at least six months prior to applying for a mortgage loan. Anyone may obtain their credit report for free once a year from www.annualcreditreport.com. Maintaining a debt-to-income ratio of less than 36% could boost your score by as much as 10%. Lenders like to see a history of long-term credit and ability to pay off a loan over time. The goal of any loan applicant should be to make sure their credit report is as accurate and sound as possible.

After you are under contract on a new home, your lender will complete the full loan approval process, lock-in your interest rate for a specified period of time (usually 30 to 60 days), and provide you with an estimate of your closing costs and monthly payments.

Find the best mortgage rates.

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Getting the Type of Mortgage that Is Best For You

Getting the Type of Mortgage that Is Best For You

Choosing a mortgage loan should seem like a straightforward process; you borrow money from a lender for a specified amount, for a set period of time, and pay it back. However, getting a loan you feel comfortable with, one that's flexible during good times and bad, can be a challenge.

Mortgage loans basically fall into one of two categories: government or conventional. Government loans are normally insured by the Federal Housing Administration (FHA) or the Veteran's Administration (VA). Some offer lower down payments and most offer favorable terms.

Conventional loans can be either conforming or non-conforming. Conforming loans follow the guidelines set forth by The Federal National Mortgage Administration (Fannie Mae) and The Federal Home Loan Mortgage Corporation (Freddie Mac). These types of loans can be either fixed or adjustable. Each is tied into a specific rate, term and limit which can vary from lender to lender. Non-conforming loans, on the other hand, do not adhere to any strict guidelines.

How do fixed-rate mortgages work?

Fixed-rate mortgages retain the same APR throughout the life of the loan. However, the property tax and homeowner's insurance, if built into the cost of the loan, may change over time. The most popular type of fixed loan is a 30-year term.

For those who prefer a shorter timeframe, a 15-year fixed mortgage may be a better option. While the amount of time it takes to repay is shorter, you can usually secure a better interest rate (.25-.50% lower than a 30-year fixed). Besides a 15- and 30-year term, fixed loans are also available 40- and 20-year terms.

Here are some other benefits and drawbacks that a conforming fixed loan has to offer.

Conforming Fixed Mortgage Loan Types

Types of Mortgages Advantages Disadvantages

15- or 20-Year Fixed

  • Interest rate and payment locked-in for the duration of the term should interest rates rise
  • Shorter amortization period allows for a quicker loan repayment leading to equity build-up
  • If interest rates go down you’re still locked-in to your original rate unless you refinance
  • Higher monthly payments than a longer term loan

30- and 40-Year Fixed

  • Interest rate and payment locked-in for the duration of the term should interest rates rise
  • Lower monthly payments due to a longer amortization period
  • If interest rates go down you’re still locked in to your original rate unless you refinance
  • Slow equity build-up since initial payments are mostly interest

How do adjustable rate mortgages work?

Unlike fixed-rate mortgages, Adjustable Rate Mortgages (ARMs) are based on shorter term securities that fluctuate upward or downward based on today's leading indexes (e.g., Constant Maturity Treasury (CMT), London Interbank Offering Rate (LIBOR), or Treasury Bill). A margin is added on top of the index rate by the lender to calculate the interest rate.

Because ARMs are adjustable, they go up and down at pre-set intervals during the duration of the loan. Some offer a low teaser rate to qualify potential buyers which accelerates to a higher rate thereafter. ARMs can adjust once a year, every month, or three to five years, and are typically amortized over a 30 year period. Some offer a lifetime cap which sets the maximum rate that can be charged during the life of the loan with some states having their own percentage limits.

Here are some of the benefits and drawbacks that an adjustable loan has to offer.

Conforming Adjustable Mortgage Loan Types

Types of Mortgages Advantages Disadvantages

Adjustable Rate Mortgage (ARM)

  • Lower payments can make it more attractive to qualify for a larger home
  • Some loans allow an option to convert to a fixed rate

 

  • Rates can adjust upward each year increasing your monthly payments
  • If even possible to convert to a fixed rate loan, the process may require payment of a conversion fee

Interest-only ARM

  • Affordable monthly payments during the initial interest-only period of the loan
  • Can refinance or pay off the loan after the interest only period
  • Can invest your principal savings into a higher yielding investment
  • Higher monthly principal and interest payments once the interest-only payment period ends
  • May not be disciplined in saving up for the pay-off amount
  • Initial interest payments go toward paying down a debt and not reducing the principal balance

Lower your payment with an Interest-only ARM loan

Another variation of the ARM is the Interest-only adjustable rate mortgage. This loan makes it affordable for borrowers to qualify for a loan by giving them the option to pay only the interest (not the principal) for the first 3-10 years of the loan. Monthly payments are usually more affordable. Afterwards, the interest rate adjusts to a traditional ARM at the current indexed interest rate with new principal and interest payments calculated for the remaining term of the loan.

Example

A 30-year ARM loan of $250,000 at 7.50% APR has interest-only payments for 5 years. The payment during this time would be $1,522 per month. After 5 years, the payment would increase to $1,816 per month.

A comparison of all the different loan types shows the potential cost savings you can achieve during the first five years of an interest-only loan versus other conventional loans.

Monthly Payment Comparison for Different Loan Types
Type of Mortgage
Loan Amount
APR*

 

 

Monthly Payment**
30/5 year Interest-only ARM
$250,000
7.31%
$1,522.00
30 year fixed
$250,000
6.17%
$1,720.35
15 year fixed
$250,000
6.05%
$2,429.02
1 year ARM
$250,000
7.67%
$1,987.85
3/1 ARM
$250,000
7.40%
$1,915.98
5/1 ARM
$250,000
7.21%
$1,894.23

 

 

* APR based on national average and may vary.

** Monthly payment includes principal and interest except Interest-only ARM which is interest-only for the first 5 years then jumps to $1,816.59 for the remaining 25 years (principal and interest included.)

Sub-prime loans

Borrowers who have a low FICO score will usually fall into the less than perfect mortgage category. As a result, they'll qualify for a loan but at a much higher rate. Lenders may apply stiffer pre-payment penalty fees in the form of interest payments to dissuade borrowers from building up any equity in their home. Some lenders may require a " balloon" payment to pay off the remaining balance of the loan after a fixed period of time.

Compare the best mortgage rates.

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