Mortgage Glossary

KeyWords

A mortgage in which your interest rate and monthly payments may change periodically during the life of the loan, based on the fluctuation of an index. Lenders may charge a lower interest rate for the initial period of the loan. Most ARMs have a rate cap that limits the amount the interest rate can change, both in an adjustment period and over the life of the loan. Also called a variable-rate mortgage.

The gradual reduction in the principal amount owed on a debt. During the earlier years of the loan, most of each payment is applied toward the interest owed. During the final years of the loan, payment amounts are applied almost exclusively to the remaining principal.

The annual cost of a loan to a borrower. Like an interest rate, the APR is expressed as a percentage. Unlike an interest rate, however, it includes other charges or fees (such as mortgage insurance, most closing costs, discounts points, and loan origination fees) to reflect the total cost of the loan. The Federal Truth in Lending Act requires that every consumer loan agreement disclose the APR. Since all lenders must follow the same rules to ensure the accuracy of the APR, borrowers can use the APR as a good basis for comparing the costs of similar credit transactions.

An informed estimate of the value of a property. When made in connection with an application for a loan secured by a home, a professional appraiser usually performs the appraisal.

A loan that provides you with lower-than-usual monthly payments for a set period of time followed by a payment larger than usual at the end of your loan repayment period. While a balloon loan may lower your monthly payments it can also mean you make higher interest payments over the life of the loan.

Closing costs, also known as settlement costs, are the costs incurred when obtaining your loan. For new purchases, these costs also include ownership transfer of any collateral property from the seller to you. Costs may include and are not limited to attorney's fees, preparation and title search fees, discount points, appraisal fees, title insurance, and credit report charges. They are typically about 3% of your loan amount and are often paid at closing or just before your loan closes.

Funds often needed to close a loan, such as homeowners insurance, property taxes, and escrow impound account funds, aren't included in closing costs and are considered separate. You should be prepared to pay these costs before your loan closes.

A closing document that provides key information such as interest rate, monthly payments, and costs to close the loan. Consumers are required to receive this form no later than 3 business days before they close on the loan.

Your total monthly debt payments (for example loans, credit cards, and court-ordered payments) divided by your gross monthly income before taxes and expressed as a percentage. Federal Housing Administration (FHA) guidelines layer in early 2017 recommend that your monthly mortgage payment should be no greater than 31% of your monthly income before taxes and your total monthly debt should be no greater than 43% of your monthly income before taxes.

A document that legally transfers ownership of real estate from a seller to a buyer and delivered to the buyer at closing. Before making a loan, a lender will usually require a title search or a title report to make sure the borrower legally owns the real estate that is being used to secure the loan.

An amount paid to the lender, typically at closing, to lower (or buy down) the interest rate. One discount point equals one percentage point of the loan amount. For example, 2 points on a $100,000 mortgage would cost $2,000. Negative points indicate the amount to be credited at closing to reduce closing costs.

The amount of cash you pay toward the purchase of your home to make up the difference between the purchase price and your mortgage loan. Down payments often range between 5% and 20% of the sales price depending on many factors, including your loan, your lender, and your credit history.

A deposit made toward a down payment as a sign of good faith. The deposit is typically made when a purchase agreement is signed.

Funds deposited with a third party, to be held until a specific date is reached and/or a specific condition is met.

A home loan with a predetermined fixed interest rate for the entire term of the loan.

A loan for which you pay only the interest due for a portion of the loan term. This lowers your periodic payment but does not decrease your principal balance on the loan. Making interest-only payments will result in larger payments being due at the end of the interest-only payment period.

Disclosure to help consumers understand the key loan terms and estimated costs of a mortgage before they make a complete application. After a consumer submits 6 key elements: name, income, social security number, property address, estimated property value and desired loan amount, the lender is required to provide this form. All lenders are required to use the same standard loan estimate form to make it easier for consumers to compare and shop for a mortgage.

A legal document giving a lender a lien on real estate to secure repayment of a loan. Mortgage loans generally run from 10 to 30 years, after which the loan is required to be paid off. Also called the deed of trust and/or security deed.

A fee imposed by a lender to cover certain processing expenses in connection with making a mortgage loan. Usually a percentage of the amount loaned (often 1%). The origination fee is stated in the form of points.

An acronym for principal, interest, taxes, and insurance. Also referred to as the monthly housing expense.

A lender’s conditional agreement to lend a specific amount of money to a homebuyer under a specified set of terms.

The principal is the amount of money borrowed on a loan. The interest is the charge paid for borrowing money. Principal and interest account for the majority of your mortgage payment, which may also include escrow payments for property taxes, homeowners insurance, mortgage insurance, and any other costs that are paid monthly, or fees that may come due.

For conventional loans, insurance that protects the lender if you default on your loan. If your down payment is less than 20%, most lenders will require you to pay mortgage insurance.

Paying off your existing loan with the proceeds from a new loan, generally using the same property as collateral, in order to take advantage of lower monthly payments, lower interest rates or save on financing costs.

The completion of a property’s sale or purchase, or the completion of all steps necessary to receive the proceeds of (and create an obligation to repay) a loan.

The number of years it will take to pay off a loan. The loan term is used to determine the payment amount, repayment schedule, and total interest paid over the life of the loan.

Written evidence of ownership in property.

Insurance that protects an interested party, either the owner or the lender, against issues that would affect legal ownership of the property.

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Cary Ridenour | President

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