When you are seeking a mortgage it may seem that the process has a
language of its own. Many times there are terms used that can be
confusing or unknown, but are important things for a borrower to
understand. The following list contains some of the more common mortgage
terms and briefly explains them. It is not meant to be exhaustive by
any means and it is always important to make sure that you fully
understand any unknown terms you encounter. Don’t be afraid to speak up,
your lender would be more than happy to explain them.
Adjustable Rate Mortgage (ARM)
This is a type of mortgage with interest rates that can fluctuate based
on market conditions over the life of the loan. Typically an ARM will
have an introductory rate and a monthly cap on the maximum monthly
payment allowed.
Amortization
This is
the progression of decreasing principal over the life of a mortgage.
Each loan payment includes a payment to the principal and a payment to
the interest. An amortization schedule is a document that includes each
payment and reveals the changing ratio of principal and interest and how
the principal will decrease over time.
Annual Percentage Rate (APR)
This is a measure of a loan’s full cost and includes interest and fees
in terms of a yearly percentage rate. Federal law requires all lenders
provide their annual percentage rate so borrowers have a way to compare
the total cost of a loan over time.
Assumption
It is an agreement in which a buyer takes over the existing mortgage and the payments to a lender.
Blanket Mortgage
This is a mortgage that will cover at least two pieces of real estate as security for a single mortgage.
Closing
This is the final meeting between a buyer and seller or their agents in which a property legally changes hands.
Closing Costs
These are expenses that are in excess of the purchase price and can
include items such as origination fees, title insurance, escrow costs,
appraisal fees, and others. Closing costs will vary depending on
location and lender.
Consumer Reporting Agency
These are organizations which monitor individual credit activity and
history to determine the risk a lender must take on to provide someone a
mortgage.
Conventional Loan
This is a
type of mortgage that is not insured by the federal government.
Typically conventional loans require a larger down payment and a higher
credit score.
Default
This is the
failure to make mortgage payments as specified in the mortgage
agreement. Defaulting on a mortgage can lead to foreclosure.
Earnest Money
It describes the process of a buyer giving money to a seller that is included in the purchase price to secure a sale.
Equity
This is the difference between the fair market value of a property and
the current amount of debt an individual holds on that property.
Escrow
It is an account set up that the buyer pays into that can cover expenses such as taxes or insurance payments.
FHA Loan
This is a loan that is insured by the Federal Government allowing
individuals who are unable to qualify for a conventional mortgage to
purchase a home.
FHA Mortgage Insurance
Insurance required when obtaining an FHA loan. The insurance amount is paid in monthly installments.
Fixed Rate Mortgage
This is a mortgage that has a locked mortgage rate which does not change over time.
Foreclosure
This is a process in which the lender can force a sale of a property
when a borrower does not meet the terms of a mortgage agreement.
Interim Financing
This involves loans such as construction loans which are temporary
financing options during a building project. Typically a construction
loan will be replaced by a permanent mortgage when the building is
completed.
Lien
A Lien is a legal claim
on a property by a lender which is held until a mortgage is paid in
full. It protects the lender in cases of default.
Maturity
This is the date that a loan’s principal balance becomes due in full.
Origination Fee
This is the fee which includes costs for a lender’s expenses including
loan document preparation, credit checks, property inspections and
appraisals, and other possible fees.
Points
Mortgage Points describe prepaid interest by the borrower which is
assessed at the time of closing. One point is the equivalent of one
percent of the loan amount. Points that are purchased may be able to
decrease monthly mortgage payments.
Refinance
Refinancing a mortgage is essentially taking out a new loan to replace a
prior loan on a property. Common reasons for refinancing are lower
available interest rates or access to funds made available because of
equity.
Security
Security is the property that a lender holds a lien on as collateral for a mortgage loan.
Underwriting
Underwriting is the process of researching and reviewing information
about a borrower and making a determination on approving a loan. It also
includes matching the level of risk with an appropriate interest rate
and loan amount.
These are the most common terms you will need
to know to understand when considering a mortgage. As mentioned before
if you don’t understand a term, don’t hesitate to ask your lender. You
need to understand exactly what you are getting into when applying for a
mortgage.