Refinance, Equity, Appraisal What It All Means: How to Speak Mortgage 101
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Mortages seem to have a language all their own. An ARM? I know what that is. It’s half of the price of the item I want every Christmas (usually followed by “and a leg”).
Lo and behold…a list of key mortgage terms translated into simple English. Whether you’re a veteran homeowner or a renter on the cusp of homeownership, keep this mortgage 101 glossary handy and you’ll be speaking mortgage in no time.
Adjustable Rate Mortgage (ARM)
A mortgage in which the interest rate – and payments – can vary. How frequently it varies depends on the borrower’s specific mortgage (e.g., 3/1, 5/1, 7/1, 10/1). The date that the interest rate changes on an ARM is called the Adjustment Date.
An estimate of the value of property made by a qualified professional called an “appraiser”, for the purpose of evaluating a property to extend home financing.
A mortgage loan which enables borrowers to obtain financing for a new house before their present house is sold. The present home is used as collateral. A bridge loan is also known as a swing loan.
When the property legally trades hands. Also called settlement, this is the meeting between the buyer, seller and lender or their agents, during which property is exchanged for funds and closing costs are paid.
Expenses over and above the price of the property that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an origination charge, property taxes, charges for title insurance and escrow costs, appraisal fees, etc. Closing costs will vary by locality and the providers used, and usually total about 3 to 6 percent of the mortgage amount.
A mortgage not insured by the Federal Housing Administration or guaranteed by Veterans Affairs.
Credit Risk Score
A credit risk score is a statistical summary or calculation of the information contained in the borrower’s credit report – much like a grade. The most well known type is the Fair Isaac or FICO score. The credit risk score is very important to most mortgage lenders when considering a loan decision.
Your total monthly debt, divided by gross monthly income and shown as a percentage. Total monthly debt includes monthly mortgage payments as well as student loans, car loans, and credit card payments.
If debt = $200 and gross monthly income = $800, the Debt-to-Income Ratio equals $200 divided by $800, or 25%. This indicates that you are well qualified to pay back the mortgage loan.
Generally, mortgage lenders want a debt-to-income ratio of 36% or under, although some lenders will accept ratios up to 50% if you have a good credit rating. Also called the back-end ratio or total debt ratio.
The difference between the purchase price and the mortgage amount, often expressed as a percentage. For example, a 20% down payment on a $230,000 home is $46,000.
A deposit made in good faith when you make an offer on a home. The money is generally applied to the down payment at closing.
Also referred to as the owner’s interest: the difference between the fair market value (what the property is worth) and current indebtedness (what is owed to the lender). This is the amount the owner would be left with after paying off any mortgages or liens, if the property was sold for market value.
Property Current Market Value = $200,000
Mortgage Loans and Liens = $150,000
Owner’s Equity = $50,000
An account held by the lender into which the homebuyer pays money to cover tax or insurance payments. As an example, the homebuyer pays $120 to the lender every month over and above the mortgage payment; the lender holds that money in an escrow account, and every six months the lender pays out $600 from the account to the town for property taxes, and $120 to a homeowner’s insurance provider. Escrow can also refer to “earnest money” deposits requested by the seller and held by a third party before closing.
The Federal Housing Administration, which provides mortgage insurance on loans provided by the FHA-approved lenders. FHA financing features lower down payments, low closing costs and no prepayment penalties.
The primary lien against a property. If the property is sold, the first mortgage holder is paid before any other lien holder.
Fixed Rate Mortgage
A mortgage in which the interest rate and monthly principal payment remains the same, or are “fixed” for the term of the loan.
The fee charged for borrowing money, usually expressed as a percentage.
The date on which the principal balance of a loan becomes due and payable. On a 30-year mortgage, this is 30 years from the closing date.
Mortgage Insurance Premium (MIP)
The up-front insurance premium and monthly charge you must pay if you get an FHA loan. The insurance helps cover the cost of reselling your home if you default on the loan.
Points (Loan Discount Points)
Prepaid interest assessed at closing by the lender. Each point is equal to one percent of the loan amount (e.g., two points on a $100,000 mortgage would cost $2,000). Borrowers can pay points to obtain a lower interest rate on the loan; in some cases, sellers will pay points in order to make the transaction more attractive to the buyer.
Principal, Interest, Taxes and Insurance (PITI)
The four components of a monthly mortgage payment (also referred to as the monthly housing expense). Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the monthly cost of property taxes and homeowners insurance, whether these amounts are paid into an escrow account each month or not.
Private Mortgage Insurance (PMI)
When buying a home with less than a 20% down payment, borrowers are usually required to carry private mortgage insurance to protect the lender from the costs of a possible default. Private mortgage insurance will usually require an initial premium payment and may require an additional monthly fee depending on your loan’s structure.
A lender’s guarantee that the mortgage rate quoted will be good for a specific number of days from the day of application.
Obtaining a new mortgage loan on a property already owned, typically to replace one or more existing loans on the property.
A mortgage made after another mortgage on the same property. The second mortgage is subordinate to the first one; if the property is sold, the second mortgage holder is only paid after the first mortgage holder.
A class of mortgages offered to customers whose credit history is insufficient to qualify for a conventional loan. Subprime loans typically carry higher interest rates and may include prepayment penalties.
A legal document that gives evidence of property ownership.
A contract by which the insurer agrees to pay the insured a specific amount for any loss caused by errors in the title to the property. Title insurance for the lender is mandatory and the charge is part of closing costs. The buyer can also choose to obtain coverage.
An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company.
The U.S. Department of Veterans Affairs, which guarantees home financing featuring little or no down payment and other favorable terms for eligible veterans, reservists and surviving spouses. VA financing is available from selected lenders that use VA-approved appraisers.
Verification of Employment (VOE)
A document signed by the borrower’s employer verifying his/her position and salary.
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