Mortgage Terms & Definitions
DefinitionsAmortization:
A method of retiring or liquidating a debt by making periodic and regular
installment payments. Amortization is the basis for fixed rate mortgages. 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. Assumable Loans:
Loans that can be transferred to a new owner if a home is sold. 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. 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 borrorwers 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. 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. 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. 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. 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. 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%. 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. 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. Escrow:
Documentation held impartially pertaining to the sale and transfer of real
estate. 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. 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
amount of about $208,800 depending on the average cost of housing in your
region. 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. 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. 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. 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. 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%. 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). 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. 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. 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. 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. Mortgage Insurance:
A type of insurance changed by most lenders to offset the risk of
your loan when your down payment is less than 20% of the value of the
home. 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. PITI: Principal,
interest, taxes and insurance. Your calculated estimated of monthly
payments. 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.
Prepayment Penalty:
A fee charged by lenders for paying your mortgage off early.
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.
Property Appraisal:
A report showing a reasonable value of 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. Refinancing:
Obtaining a new mortgage loan that pays off your existing loan thus
creating new payment and interest rate terms. 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. Second Mortgage:
A second loan on the same property and home that the first mortgage loan
is secured by.
Uniform Residential Loan Application (1003): This
application, also called a URL-1003 is the standard loan application used
by all lenders. 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. 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.
Compliments of
Verdis Appraisal
Service 211 Monterey Street,
Salinas, California 93901
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