Terminology

Annual Cap: A term that applies to ARMs. Once an ARM is in its adjustment period, the rate is capped at a percentage on a yearly basis.

APR (Annual Percentage Rate): Annual percentage rate (APR) is the cost of the loan plus note rate and fees, irrespective of the party paying for those fees, expressed as a yearly rate.

Appraisal: The fair market value of your property.

Adjustable Rate Mortgage (ARM): An ARM is fixed for a specified number of years, then enters into an adjustment period.  When it enters adjustment, your new rate will be based on fixed Margin + a pre-specified Index.

Amortization: The time period that monthly payments are calculated over.

Balloon Mortgage: A loan product that is generally fixed for 5 or 7 years, after which you are required to pay your loan balance in full.

Commitment: A written statement from a lender that specifies the amount it is willing to loan you, at what rate and for how long.

Conventional Loan: Any loan that is not underwritten or insured by a government agency.  Government loans include Federal Housing Administration (FHA) and Veterans Affairs (VA) loans.

Deed of Trust: The instrument that secures your property for the lender as collateral for your debt.

Default: Failure to make your mortgage payment to your lender.

Earnest Money Deposit: An earnest money deposit is used in a purchase when the potential buyer puts down a portion of his or her total down payment to show good faith that they truly intend to purchase the property. This is an important facet of the purchase process, so please speak about this in depth with your Realtor®.

Equity: The market value of your home less any liens (mortgages) owed.

Federal Housing Administration (FHA) loans: Loans that are insured by the government.  Advantages include: lower minimum FICO score requirements; lesser down payment requirement than Conventional loans. Disadvantages include: Upfront Mortgage Insurance Premium, Monthly Mortgage Insurance and forced to have an impound account.

FICO (Fair Isaac and Company): Your credit score as calculated into a formula. The terms ‘credit score’ and ‘FICO’ are used interchangeably.

Fixed Rate Mortgage: A loan product in which after the rate is locked, it is fixed for the entire life of the loan.

Float: “Floating” a rate means that you are not locked in or guaranteed a particular rate. You may choose to float if you feel that interest rates will decrease, or if a property address has not yet been determined (in a purchase pre-approval).

Good Faith Estimate: Required by law to be sent out to borrowers within 3 days of applying for a loan. In good faith, the lender or broker must disclose to the best of their ability the cost of the loan.

HO-6 Insurance: This is also called “walls-in” or interior insurance, which is required on condos or townhouses when the HOA dues do not cover insurance for the interior of the unit.

Homeowners Insurance: This insurance is required by the lender, although there are various policies from the most standard to the most extensive. The amount of insurance a lender requires will cover the property itself, not necessarily the possessions within.

Impound Account: In lieu of paying property taxes and homeowners insurance on your own twice a year, you may choose to have the lender pay for them instead by adding the cost to your monthly mortgage payment.

Index: Associated with ARM products. Once your ARM enters its adjustment phase, your rate is determined by the Index + Margin. There are multiple index options, and each one has distinct market characteristics and fluctuates differently.

Lifetime Cap: Associated with ARM products. Your start rate plus a certain percentage amount (usually 5%) determines your lifetime cap, which means that the rate you pay at will never exceed that cap.

Loan-to-Value Ratio (LTV): Your LTV ratio is the amount of the loan you receive divided by the appraised value of your home. A lower LTV means less risk to the lender.

Lock: When you lock in a rate, that rate is your guarantee, as long as your loan closes within the pre-determined time frame, usually 15, 30 or 45 days.

Margin: Associated with ARM loan products. Essentially, it is the lender’s cost of doing business and does not fluctuate. Margins generally range from 2.25% to 4%, depending on which ARM product you choose.

Mortgage Insurance/Private Mortgage Insurance: Mortgage Insurance is a premium you pay when you either have less than 20% down (Conventional loan) or if you get an FHA loan (regardless of down payment).  It serves to protect the lender against you defaulting on your mortgage.  It is also known as “PMI” or “MI”.

Points: Points are loan origination fees and each point totals 1 percent of the loan amount. They will increase your upfront closing costs, but will reduce the interest rate.

Pre-approval: A written pre-approval means that you have submitted all necessary documentation to receive a loan and that a lender will back up your offer to purchase a home.

Preliminary Title Report: A title company completes a search to determine if there are any other claims to ownership for the specified property.

Promissory Note: States that you promise to pay the lender the amount owed.

Property Taxes: Determined by your assessed value. You pay taxes to the county for community services such as schools, public works, and local government.

Qualifying Ratio: Also known as a debt-to-income ratio. Every lender utilizes a qualifying ratio guideline for approval of a loan. Your homeowner costs (Principal, Insurance, Taxes, and Insurance) and your monthly liabilities are added up and then divided by your monthly income to determine qualification for a loan.

Reserves: The lender will review your assets to confirm how many months reserves you have left in your accounts after the down payment and closing costs. Essentially, if you were to lose your job, how many months’ worth of a total housing payment do you have in your savings/checking, brokerage and retirement accounts.

Title Insurance: Required in every purchase and refinance. You are insured that the title company will pay for any loss caused by defects of title on your real estate.

Upfront Mortgage Insurance Premium (UFMIP): An FHA charge that requires 1.75% of the loan amount upfront, in addition to the monthly MI.

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