REAL ESTATE Frequently Asked Questions
- Common Mortgage Terms
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For the average person, buying real estate is one of the most significant, and possibly the most complicated, purchases they make. An understanding of the meanings of the following commonly used terms may make the process less complicated.
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Common Terms - Select a term to see the definition
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Definitions:
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| Adjustable Rate Mortgages (ARMS): A type of mortgage loan that usually has a term of 30 years where the interest rate fluctuates and depends on a particular interest rate index. The advantage of this type of loan is that lenders typically offer initial discounts (called teaser rates) on the interest rate index making the loans less expensive than a traditional fixed rate mortgage. In addition, the loan payment goes up and down depending on the actual financial conditions of the economy which can be an advantage if interest rates remain constant or decline during the life of the loan. The disadvantage of this type of loan is that your exact payment over time is unpredictable and can increase. |
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| Amortization: A method of retiring or liquidating a debt by making periodic and regular installment payments. Amortization is the basis for fixed rate mortgages. |
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| Annual Percentage Rate (APR): This is the actual rate of interest your loan would be if you included all of the other associated costs such as closing costs and points. |
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| Assumable Loans: Loans that can be transferred to a new owner if a home is sold. |
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| Balloon Loans: A type of mortgage loan that is exactly like a traditional fixed rate mortgage except that it becomes 100% due after a specified amount of time has elapsed. When the loan matures, you must pay the loan off in cash (Balloon Payment) or refinance. The advantage of this type of loan is that the initial rate is usually lower than a normal fixed rate loan. The disadvantage of this type of loan is that you may have to refinance or pay off the loan if you do not sell the home by the time the loan matures. |
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| BC & D Lender or Loan: The term BC & D is a rating of the loan. Similar to Moody's Rating scale for Bonds as AAA, AA, A, etc.. Generally, loans termed as A paper are for borrowers with very good credit. BC & D lenders specialty in BC & D loans. For the most part, on our web site, we refer to BC& D as "problem or troubled" credit rather than using these letters. |
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| Buydown: The process of paying additional points on the loan to reduce the monthly mortgage. There are typically two specific types: a Permanent Buydown, and a Temporary Buydown. In a Permanent Buydown, a sufficient amount of interest is prepaid to lower the rate permanently. In a Temporary Buydown, only a sufficient interest is paid to lower the payment for the first three years. The reason to Temporarily Buydown a loan is to lower the current payments thereby more easily qualifying for the loan. This usually makes sense because income will usually continue to increase as the interest rate does. The most common Temporary Buydown is called 3-2-1, meaning three percent lower the first year, two percent lower the second year, and one percent lower the third year. |
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| Convertible: An option available on some adjustable rate mortgages (ARM's) that allows the loan to be converted to a fixed rate mortgage. Conversion usually involves paying a one-time fee and conversion may be limited to within a certain time-frame. |
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| Cosigner: Someone who is willing to sign a mortgage loan obligation with you in case you default on your monthly payments. Normally, the cosigner is required to go through the same application and approval process as the original signer of the loan. |
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| Credit Report: A search through your existing credit history by a qualified credit bureau to determine if, and the number of times, you may have been delinquent making monthly payments on previous debts. Even when a credit report is for the most part positive, many lenders require written explanations for any negative comments within the credit report. This type of report is usually required to obtain a mortgage loan. |
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| Debt Ratio: One of several financial calculations performed by your lender to determine if you can afford a particular monthly payment. The debt ratio (also known as the obligations ratio) is the sum of all of your monthly debt payments including your total monthly mortgage payment divided by your total monthly income. Typically acceptable debt ratios for Conventional Loans are 36-38%, FHA Loans are 41-43%, and VA Loans are 41%. |
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| Discount Rate: Many lenders may offer you a lower "teaser" rate on an adjustable rate mortgage for the first adjustment period. After this period is over, the lender will adjust your loan according to the normal lenders margin rate. |
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| Down-payment: The amount of money you put down, normally anywhere from 5-25%. |
| Equity: The difference between the amount owed on the loan and the current purchase price of the home or property. |
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| Escrow: Documentation held impartially pertaining to the sale and transfer of real estate. |
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| Foreclosure: A court proceeding in which the rights as owner of a home are relinquished and the home is sold to secure and pay-off the debt. |
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| FHA (Federal Housing Authority) Loan: A type of government loan administered by the Federal Housing Administration. An FHA loan typically requires higher mortgage insurance premiums, and has a maximum loan amount of about $124,875 depending on the average cost of housing in your region. |
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| Fixed Rate Mortgages: A type of mortgage loan usually with 30 or 15 year loan terms where the interest rate remains constant throughout the life of the loan. The advantages of a fixed rate loan is your own security that the interest rate will not increase. The disadvantage of a fixed rate loan occurs when interest rates substantially decline below the interest rate of your loan. |
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| Government Loans: One of two loan types called FHA or VA loan. These loans are partially backed by the government and can help veterans and low-to-moderate income families afford homes. The advantages of these types of loans is that they often have a lower interest rate, are easier to qualify for, have lower down-payment requirements, and can be assumed by someone else if the home is sold. Many mortgage bankers can obtain these type of loans for you. |
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| Graduated Payment Mortgages: A type of mortgage where the monthly payments start low but increases by a fixed amount each year for the first five years. The payment shortfall or negative amortization is added to the principal balance due on the loan. The advantages of this type of loan is a lower monthly payment at the beginning of the loan term. The disadvantages are typically a slightly higher rate than traditional fixed-rate mortgage loans and lenders usually require a larger down payment. In addition, the negative amortized amount increases the balance due on the total loan which can be a problem if the value of the home declines. |
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| Growing Equity Mortgage: A type of mortgage where the monthly payments start low but increase by a fixed amount each year for the entire life of the loan as compared to five years with a Graduate Payment Mortgage. The advantage of this type of loan is that the loan can usually be paid off in a shorter duration than a traditional fixed rate loan. The disadvantage of this loan is that the payment continues to go up irrelevant of the income of the borrower. |
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| Housing Ratio: One of several financial calculations performed by your lender when applying for a conventional loan to determine if you can afford a particular monthly payment. The housing ratio (also known as the income ratio) is your total monthly payment including taxes and insurance divided by your total monthly income. Typically acceptable housing ratios for Conventional Loans are 28-33% and FHA Loans are 29-31%. |
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| Index: A nationally published financial measure of economic conditions usually relative to other financial instruments such as bonds or Treasury Bills. The lender uses a particular index (such as the 6 month Treasury Bill) to calculate your particular monthly payment by adding a fixed margin to the index. The margin is the lenders profit and is over and above the normal index because of the assumption of loan risk. Your lender will adjust the interest on your ARM at regular time intervals also called adjustment intervals (like 6 months), by adding their particular margin to the particular index of the loan. The amount the loan is adjusted is also controlled by a periodic cap (the maximum amount the loan can change during your particular adjustment interval), the monthly cap (the maximum amount the monthly payment can
change from one adjustment interval to the next), and the lifetime cap (the total amount the loan can change from the initial rate of the loan). |
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| Jumbo (or Non-Conforming) Loans: A mortgage loan that exceeds the amount that is acceptable by the government if the loan were to be resold (on the secondary market) to Fannie Mae and Freddie Mac. Usually, loans with a face value greater than $207,000. |
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| Lenders Margin: This is simply the profit the lender expects to receive from the loan. You can ask your lender what the margin is on an adjustable rate mortgage. Typically, lenders use a discount rate initially as a "teaser" rate. You must be sure to get the normal margin after the discount period is over. |
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| Loan to Value (LTV) Ratio: The Loan to Value ratio is simply the amount of the mortgage divided by the purchase price of the property or worth of the property. Higher LTV ratios may require mortgage insurance. The amounts vary but usually ratios above about 80% require insurance. Fannie Mae and Freddie Mac also have LTV limits. |
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| Lock-in: The process of fixing the interest rate for a specific period of time irrelevant of future or impending economical changes to the interest rate. This process may require a fee or premium as it reduces your risk that the monthly payments will change while the loan paperwork is filed. |
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| Mortgage Insurance: A type of insurance charged by most lenders to offset the risk of your loan when your down payment is less than 20% of the value of the home. |
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| Mortgage Reduction Programs: A type of accelerated payment program whereby payments are made more frequently usually bi-weekly or weekly rather than the traditional monthly payment. Making more frequent and accelerated payments reduces the amount of principal more quickly which interest accumulation is based on. The net effect can be a savings on the total interest paid. |
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| PITI: Principal, interest, taxes and insurance. Your calculated estimated of monthly payments. |
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| Points: Loan fees charged by the lender that help to increase the profit related to a particular quoted interest rate. A point is typically one (1) percent of the mortgage amount. |
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| PMI: Private Mortgage Insurance is insurance charged by most lenders to offset the risk of your loan when your down payment is less than 20% of the value of the home. |
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| Prepayment Penalty: A fee charged by lenders for paying your mortgage off early. |
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| Pre-qualification: The process of determining the amount of money a particular lender will let you borrow. You should strive to obtain pre-qualification with at least two to three separate lenders. |
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| Property Appraisal: A report showing exactly how much the particular home and property is worth as compared to other recently sold properties within your general area. A property appraisal is normally required to obtain a mortgage loan. |
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| Refinancing: Obtaining a new mortgage loan that pays off your existing loan thus creating new payment and interest rate terms. |
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| Residual Income: The amount of money left over after you have paid all of your ordinary and necessary debts including the mortgage. This calculation is typically used with VA loans. |
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| Second Mortgage: A second loan on the same property and home that the first mortgage loan is secured by. |
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| Uniform Residential Loan Application (1003): This application, also called a URL-1003 is the standard loan application used by all lenders. |
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| Underwriter: The underwriter is the lender or company who actually provides the money for your loan. A mortgage broker "brokers" and represents several different underwriters and depending on your situation they choose the "best" underwriter for you and your loan. |
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| VA (Veterans Administration) Loan: A type of government loan administered by the Veterans Administration. Eligibility for VA loans is restricted and limited to qualifying veterans, and to certain home types. You need to check with the VA to determine if you qualify. The maximum VA Loan is $184,000. |
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