If you are shopping for a new home, the following are some important terms that are used by lenders and real estate sales agents:
Acceleration Clause: A clause which gives the lender the right to demand payment in full if borrowers miss a payment or violate any other agreement stipulated by the mortgage.
Appreciation: An increase in the value of a home due to market conditions or other causes.
APR: Annual percentage rate. Not to be confused with the interest rate on the loan usually quoted by lenders, the APR reflects the total yearly interest payment, which is the compounded interest plus points and any other costs that were added to the loan.
ARM: Adjustable rate mortgage. This type of loan has an interest rate which fluctuates according to economic indexes. Pros: due to initially lower interest rates, home buyers may be able to qualify for a more expensive house than with a fixed-rate loan with a higher rate. If interest rates decline, borrowers could save money. Cons: interest rates may increase. In difficult times, higher payments due to rising rates could pose a problem for those without extra savings.
Amortization: The process of decreasing the loan principal by making payments balanced to pay off a percentage of the principal, rather than just the interest.
Assumable Mortgage: A loan which can be taken over by a buyer when a home is sold.
Balloon Mortgage: A mortgage with monthly payments that will amortize it over a stated term, which also provides an option for a lump sum payment to be due at the end of an earlier specified term.
Buy-Down Mortgage: A subsidy provided by someone other than the buyer, usually the seller, to reduce the borrower’s monthly payment for a specified period or for the entire term of the loan
Closing Costs: Fees due at the closing of the deal, in addition to the down payment. Some common closing costs include points and other loan charges, escrow fees, homeowner’s insurance, title insurance, property taxes, legal fees, inspections, private mortgage insurance, prepaid loan interest, recordings, courier fees and notary fees.
CMA: Comparable Market Analysis. A written analysis of comparable homes for sale, and those sold in the past six months. This enables buyers to see if their home is priced fairly.
Conforming Loan: A loan of $417,000 or less for a single unit dwelling.
Conventional Mortgage: A standard home loan through a bank or mortgage company, not insured by the government, such as an FHA or VA loan.
Convertible Adjustable-Rate Mortgage: An ARM with the option of converting to a fixed-rate mortgage after a specified length of time.
Debt-To-Income Ratio: What lenders use to determine the loan amount a home buyer qualifies to borrow. Housing costs cannot exceed a set portion of the borrower’s monthly income.
Depreciation: A decline in property value due to market conditions or other causes.
Down Payment: The portion of the purchase price of a property that the buyer pays in cash and does not finance with a mortgage.
Due-On-Sale Clause: A clause in a mortgage loan which gives the lender the right to demand payment in full when the property is sold.
Escrow: Once the buyer signs a contract with the seller, all deeds, documents, funds, etc. pertaining to the transaction go into an escrow account to be handled by a third party and be dispersed upon closing.
Equity: A homeowner’s financial interest in a property. Equity is the difference between the current market value of a home and the amount still owed on its mortgage.
Fannie Mae: Federal National Mortgage Association (FNMA). A congressionally chartered, privately held company that is the nation’s largest supplier of home mortgage funds.
FHA: The Federal Housing Administration insures loans made by private lenders to qualified home buyers.
Freddie Mac: Federal Home Loan Mortgage Corporation (FHLMC). Freddie Mac, part of the Federal Home Loan Bank Board, buys loans from banks and lenders and sells them to investors.
Hazard Insurance: Required insurance for homeowners, covering a home and its contents due to damage, loss or fire (flood is usually not included).
Impound Account: An account created by the lender to pay a borrower’s property tax and insurance costs. The tax and insurance costs are added to the borrower’s monthly mortgage payment. The lender holds and disburses the funds when due.
Index: A published interest rate to which the interest rate on an Adjustable Rate Mortgage (ARM) is tied. Some commonly used indices include the 11th District Cost of Funds (COFI), One Year Treasury Bill, and Six Month LIBOR.
Interest Cap: A ceiling on the interest rate for ARMs. This limit specifies how much the ARM interest rate can fluctuate in a given time period.
Jumbo: A loan of $417,000 or greater for a single unit dwelling.
Lifetime Cap: A provision of an ARM that limits how high the interest rate can climb over the life of the loan.
Lock: Also called a lock-in. A written agreement from the lender guaranteeing the interest rate and the amount of points to be paid within a specified period of time.
Margin: The percentage a lender adds to the index value to calculate the ARM interest rate at each adjustment period.
PITI: Principal, interest, tax and insurance–a home buyer’s monthly housing expense.
PMI: Private Mortgage Insurance. An insurance policy which protects the lender should the borrower default. PMI is usually required for loans that exceed 80% of the value of the property.
Points: Charges levied by the lender to be paid at closing by the buyer. A point is one percent of the face value of the loan. For example, on a $390,000 loan, one point would be $3,900.
Prepayment Penalty: A fee required by the lender if the loan balance is paid off early.
Principal: The face value of the loan or mortgage.