Whether you’re buying a home or refinancing your current mortgage, it’s important to understand the mortgage process, and that includes understanding common terms used by lenders and real estate agents. Find the most found mortgage terms below to help increase your understanding:
Adjustable-Rate Mortgage (ARM)
An ARM is a loan in which the interest rate varies. The initial interest rate is fixed for specified period, then can fluctuate for the remainder of the loan term. ARM loans have caps built into the terms of the loan that will prevent your rate above a certain rate or falling below a certain rate over the entire course of the loan.
When paying a home loan, your monthly payments go towards the interest and principal owed. Amortization is how the payments are spread out over the course of your loan.
The total of all income a person earns over the course of an entire year. Income is made up of salary, tips, bonuses, wages, commission, and overtime earned.
Annual Percentage Rate (APR)
Usually expressed as a percentage, APR is the interest rate you are contracted to pay on your loan, in addition to lender fees.
An unbiased, expert opinion of how much your home is worth. Lenders require appraisals prior to approving home loans to ensure the buyer/homeowner is not taking a loan amount higher than what the home is worth.
Payment to an appraiser who provides the unbiased, expert opinion of a home’s value.
Anything you own that has a cash value. Examples of assets are savings accounts, retirement accounts (401K, IRA), stocks and bonds.
A loan in which the borrower makes low agreed-upon monthly payments (often interest only) for a set period of time, then is required to pay off the balance with one lump sum payment at the end of the term of the loan.
Legal process in which people declare they cannot pay back their debt to their creditors. If bankruptcy is declared through a court order, a person will not have to back their debt, however bankruptcy will ruin a person’s credit preventing them from being able to apply for loans in the future.
A type of refinance in which you take out a new loan for a larger amount of money than what your current loan is in order to use the equity in your home to get cash back.
Settlement fees that are paid to your lender in order for them to finalizing your loan. Closing costs can include appraisal fees, loan origination fees, inspection fees, title insurance, PMI, etc.
A type of home loan that is available through a private lender and not secured by a government agency.
A detailed summary, which is prepared by credit bureaus, that includes an individuals personal information, history of bankruptcies, credit history, payment habits, and lines of credit.
Debt-To-Income (DTI) Ratio
A total of your monthly debt payments divided by your gross monthly income.
Legal document that proves you own your home.
Discount Points aka Mortgage Points
Pre-paid interest that you can choose to pay in order to get a lower interest rate on your mortgage loan. One point equals one percent of the loan amount. Discount points are paid at closing.
Up-front payment made at the time you purchase a home, usually paid in cash.
Earnest Money Deposit
Payment (usually 1% - 3% of home’s value) made to the seller when making an offer on a home. The earnest money deposit shows the seller you are serious about purchasing their home.
Indicates the amount of ownership you actually have in your property. The more payments made on your loan, the higher amount of equity you have.
An arrangement in which a third party holds and disburses money for property taxes or homeowner’s insurance.
Federal Housing Administration (FHA)
Government agency that provides mortgage insurance on FHA mortgage loans.
A loan that is insured by the federal government that protects a lender against loss if a homeowner defaults on their loan. FHA loans help to increase the availability of affordable housing.
The Federal National Mortgage Association (Fannie Mae) buys mortgages from lenders so the lenders can reinvest their assets into more lending.
Mortgage that has the same interest rate throughout the entire term of the mortgage loan.
Government agency that buys mortgage loans from lenders in order for lenders to be able to provide more loans to home buyers.
The difference between the actual value of a person’s home and the amount of the mortgage balance.
Home Equity Loan
A type of loan that allows you to take your home’s equity and borrow money using the equity as a collateral. This type of loan is often called a second mortgage.
An inspection that specifies problems in a home. During an inspection, the heating and cooling system, electrical, plumbing, etc. are tested and reported on.
Insurance, or a protection, that your pay for monthly that compensates your if your home is damaged by an even that is covered by the insurance, such as a fire or a burglary.
Department of Housing and Urban Development (HUD) implements and oversees national programs that address housing needs in America, improves and develops the nation’s communities and enfources hair housing laws.
A fee you pay at closing that covers the costs of processing a mortgage transaction.
A pre-qualification which indicates how much a person can afford to take out in a loan.
The amount of money borrowed from a lender. It indicates the actual balance of your loan, excluding the interest on the loan.
Private Mortgage Insurance (PMI)
PMI is a cost associated with conventional loans, which are not backed by the federal government, so that lenders are protected if a borrower defaults on his/her mortgage.
A tax paid to your local government that is based on your home’s value and where you live.
Real Estate Agent
A licensed property professional who is hired to represent a buyer or a seller in a real estate transaction. In short, they assist sellers in finding buyers for their homes, and assist buyers in finding homes in their price range and desired location. They also prepared documents and letters and work to get you the best overall deal.
The process of trading an original loan for a new loan in order to lower an interest rate, change the terms of a loan (go from 30 year to 15 year, etc) or use the equity in your home for cash.
Costs that the seller agrees to pay at closing. Often times these might include fees that buyer asks the seller to pay for such as appraisal fees or the title search.
The number of years you are to pay on your loan before the loan is paid off and you fully own the home.
Proves legal ownership of property. A property title is not an actual document but is a “bundle of rights” held by an individual or multiple individuals, indicating they have some type of legal ownership of the property.
Part of your closing costs as a one-time fee, title insurance protects you from financial loss and legal expenses if there is a problem or error on the title to your property.