Shopping for a home can be very exciting but also very confusing.
Because you may be wondering what some of the terminologies mean, we have provided this glossary of mortgage terms. Your loan officer can explain these terms in greater detail and also provide you with more information.
Adjustable-Rate Mortgage (ARM)
A mortgage loan in which the interest rate can go up or down based on market conditions. Changes in the interest rate are determined by a financial index.
The gradual repayment of a mortgage by installments. The payments of both principal and interest are calculated so that the debt is paid off at the end of a fixed period of time.
Annual Percentage Rate (APR)
The total yearly cost of a mortgage stated as a percentage of the loan amount; includes such items as the base interest rate, private mortgage insurance, and loan origination fee (points).
A professional opinion of the market value of a property.
The valuation placed on a property by a public tax assessor for the sole purpose of taxation.
An item that has monetary value such as cash, stocks, and real estate. Information about your assets is required when applying for a mortgage loan.
The final step in the mortgage loan process. The closing is a meeting between the homebuyer, seller, and lender in which mortgage documents are signed and title to the property passes from the seller to the buyer.
Costs that the buyer of the home has to pay at the time of purchase. Closing costs can include origination fees, discount points, appraisal fee, title search, title insurance, taxes, deed recording fee, credit report charges, and lawyer's fees. They may also include other fees such as one-year premiums for homeowner's insurance or private mortgage insurance. Closing costs are usually two to four percent of the mortgage amount, are in addition to your down payment, and vary slightly from lender to lender.
Property pledged as security for repayment of the mortgage loan.
A condition that must be met before a contract is legally binding.
Any mortgage that is not insured or guaranteed by the federal government.
A report of an individual's credit history prepared by a credit bureau and used by a lender in determining a loan applicant's creditworthiness.
A ratio that compares all of your monthly debt payments, such as credit card and car payments, to your monthly income. This ratio is used as one factor by the lender to see if you qualify for a mortgage loan.
The legal document conveying title to a property.
The part of the purchase price that the buyer pays in cash and does not finance with a mortgage. Down payment usually consists of 5-20% of the sale price on a conventional loan.
A deposit made by the potential home buyer to show that he or she is serious about buying the house.
An account often required by the lender to pay taxes and insurance. Every time a mortgage payment is made, a portion goes into the escrow account. When the taxes and insurance bills are due on your home, the lender pays the bills with funds from this account.
A homeowner's financial interest in a property, or the amount of the home you actually own. Equity is the difference between the fair market value of a property and the amount still owed on the mortgage.
A mortgage loan made by an approved lender in which the Federal Housing Administration insures the borrower's ability to repay the debt. Also referred to as a government mortgage.
A mortgage that has first claim in the event of a default.
A mortgage in which the interest rate does not change during the entire term of the loan.
Lenders require home buyers to purchase homeowner's insurance. This protects you against fire and, in some areas, floods as well. Most policies also protect the homeowner against theft and liability should someone be injured on the property.
A ratio that compares all your monthly housing expenses to your monthly income. This ratio is used as one factor by the lender to see if you qualify for a mortgage loan.
The fee charged for borrowing money.
An outstanding debt such as a loan or credit card balance. Information about your liabilities is required when applying for a mortgage loan.
A legal claim against a property that must be paid off when the property is sold.
The relationship between the amount of a mortgage loan and the property's appraised value, expressed as a percentage.
A legal document that pledges a property to the lender as security for the payment of a debt.
Mortgage Insurance Premium (MIP)
The fee paid by a borrower to the FHA or private insurer for mortgage insurance.
A fee paid to a lender for processing a loan application; it is stated as a percentage of the loan amount.
Stands for principal, interest, taxes and insurance-the components of a monthly mortgage payment.
Points (also called "discount points")
Finance charges paid to the lender as part of your closing costs. Each point equals one percent of your total mortgage loan. Points can be negotiable and are sometimes tied to your mortgage rate. Paying more points to get a lower interest rate may be a good idea if you plan to take a long-term loan.
The process of determining how much money a prospective home buyer will be eligible to borrow before applying for a loan.
The amount borrowed or the remaining unpaid balance excluding interest; also that part of the monthly payment that reduces the outstanding balance of a mortgage.
Private Mortgage Insurance (PMI)
Insurance the buyer carries to guarantee that the lender is paid off if the buyer defaults (fails to pay) on a mortgage. This is different from homeowner's insurance. It is generally required for all mortgages with less than a twenty percent down payment. The exact amount depends on the amount of the loan and the size of the down payment.
Purchase and Sale Agreement
A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.
The process of paying off one loan with the proceeds of another loan using the same property as security.
A mortgage that has a lien position subordinate to the first mortgage.
A legal document evidencing a person's right to or ownership of a property.
An insurance policy which protects purchasers and lenders against losses arising from defects in the title to real property.
A check of the title records to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding.
The process of evaluating a loan application to determine the risk involved for the lender. It involves an analysis of the borrower's creditworthiness and the quality of the property.
A long-term, low- or no-down payment mortgage loan in which the Veterans Administration (VA) guarantees the homebuyer's ability to repay the debt. Also referred to as a government mortgage.
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