20
Mortgage Terms You Must Know!
Buying a home is a major achievement in
most everyone’s life. Pride of
ownership, tax breaks and equity are
just a few of the many benefits you’ll
enjoy with your new home. Your home
purchase may also be one of the largest
you will ever make.
During the emotional excitement of
buying a home, you may encounter terms
with which you are unfamiliar. For some,
it can be bit embarrassing to ask what
they consider too many questions. Others
may make a note of their questions but
simply forget to revisit those points.
To ensure that you have complete
confidence during your home loan
process, invest a moment to read this
report and become familiar with the
concepts and terms you’ll encounter.
Knowledge is power and the more you know
the more successful will be your
decisions and the more soundly will you
sleep at night having made them.
Adjustable Rate Mortgage (ARM)
Also referred to as a Variable Rate
Mortgage. A mortgage in which the
interest rate is adjusted periodically
based on a pre-selected index.
Annual Percentage Rate (APR)
An interest rate that reflects the cost
of a mortgage as a yearly rate. This
rate takes into account any points and
fees and is based on the loan going to
it’s full-term.
Assumption
An agreement between buyer and seller in
which the buyer assumes responsibility
for the seller’s existing mortgage.
This agreement usually saves the buyer
money because closing costs and the
current interest rate, possibly higher,
do not apply.
Buy-down
A method of lowering the buyer’s
monthly payment for a short period of
time. The lender or homebuilder
subsidizes the mortgage by lowering the
interest rate for the first few years of
a loan.
Caps
A limit in the amount the interest rate
or monthly payments for an adjustable
rate mortgage that may change.
Closing
Also referred to as settlement. The
meeting at the conclusion of a real
estate sale in which the property and
funds are exchanged between the two
parties involved.
Debt-to-Income Ratio
The ratio, expressed as a percentage,
which results from dividing a
borrower’s monthly payment obligation
on long-term debts by the borrower’s
gross monthly income.
Discount Points
Prepaid interest assessed at closing by
the lender. A point is equal to 1
percent of the loan amount.
Down Payment
Cash paid by the buyer at closing that
makes up the difference between purchase
price and the mortgage amount.
Earnest Money
Money given by a buyer to a seller as a
deposit to commit the buyer to the
future transaction. Earnest money is
subtracted from closing costs.
Equity
The value an owner has in real estate
over and above the obligation against
the property. Equity is fair market
value minus the current indebtedness.
Escrow
Funds given to a third party which will
be held to cover payments such as tax or
insurance payments and earnest money
deposits.
Fixed Rate Mortgage
A mortgage in which the interest rate
remains constant throughout the life of
the loan.
Loan-to-Value Ratio
The ratio between the amount of the
mortgage loan and the appraised value of
the property.
Market Value
The price that a property could possibly
bring in the marketplace.
Mortgage Insurance
Insurance that protects lenders against
loss if a borrower defaults. This is
required when the loan-to-value ratio is
greater than 80 percent.
Origination Fee
A fee charged by a lender for processing
a loan application; usually computed as
a percentage of the loan.
PITI
Refers to Principal, Interest, Taxes,
and Insurance.
Underwriting
The decision-making process of granting
a loan to a potential homebuyer.
Variable Rate Mortgage
Also referred to as Adjustable Rate
Mortgage. A mortgage in which the
interest rate is adjusted periodically
based on a pre-selected index.
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