Buying A Home - Part 5: Glossary of Terms

Buying A Home - Part 5: Glossary of Terms

 

Adjustable Rate Mortgage (ARM)

 

A mortgage in which the interest rate is adjusted periodically based on a pre-selected index and margin.

Amortization

 

Means of loan payment by equal periodic payments calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance.

Annual Percentage Rate (APR)

 

The interest rate that reflects the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage, because it takes into account points and other credit costs. The APR allows home buyers to compare different types of mortgages based on the annual cost for each loan, however not all lenders calculate APR the same way.

Buydown

 This is when the lender and/or home builder subsidizes the mortgage by lowering the interest rate during the first few years of the loan. While the payments are initially low, they increase when the subsidy expires.

Construction Loan

 

This is a short-term interim loan for financing the cost of construction. The lender advances funds to the builder at periodic intervals as the work progresses.

Discount Points

 

Prepaid interest assessed at closing by the lender. Each point is equal to 1% of the loan amount, i.e., two points on a $100,000 mortgage would equal $2,000. Discount points are charged to reduce the interest rate.

Down Payment Assistance Program (DPA)

 

Down Payment Assistance Programs are funds given to buyers to assist with the purchase of a home. Buyers do not have to repay these funds. To learn what type of DPA Programs are available, ask your lender about local program options in your area.

Earnest Money or Escrow Deposit

 

Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.

FHA Loan

 

A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans, they are generous enough to handle moderately-priced homes almost anywhere in the country.

FHA Mortgage Insurance

 

All types of Mortgage Insurance protect the lender in the event of default. There are two types of FHA Mortgage Insurance. Up-front Mortgage Insurance (MIP), paid at closing and Monthly Mortgage Insurance, paid monthly with the mortgage payment. The upfront premium is 1.75% of the loan amount and monthly premiums range from 0.00% to 0.55%, depending on the length of the loan (15 years or less or longer than 15 years) and the loan-to-value.

First Time Home Buyer Program

 

Mortgage loans with special qualifying terms for those who have never owned real estate or have not in the previous 3 years. Although the programs and terms vary by state, they often offer down payment and closing cost assistance.

Impound/Escrow Account

 

That portion of a borrower's monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as reserves.

Index

 

A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as varying US Treasury Security yields and varying London Interbank Offered Rate [LIBOR] yields) which is then used to adjust the interest rate on an adjustable rate mortgage (ARM) up or down.

Loan Level Price Adjustments (LLPAs)

 

Loan-Level Price Adjustments are automatic, cumulative fees based on credit scores and the amount of your down payment. Fannie Mae (FNMA) and Freddie Mac (FHLMC) levy these fees on borrowers with credit scores below 720. They have nothing to do with the mortgage company or its various products and cannot be negotiated away.

Margin

 

The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.

Mortgage Broker

 

This person assists in arranging funding or negotiating contracts for a client. Brokers usually charge a fee or receive compensation for their services.

Mortgage Insurance (MI)

 

Money paid to insure the mortgage when the down payment is less than 20%. See Private Mortgage Insurance or FHA Mortgage Insurance.

Origination Fee

 

Fee charged by a loan originator to provide the borrower with a lower interest rate. Usually charged as a percentage of the loan amount.

PITI

 

Also known as total monthly housing expense, this is an acronym for the principal, interest, taxes and insurance.

Piggy Back Loan

 

"Piggy Back Loan" is a slang term, which really is another way of describing 1st and 2nd mortgages that close concurrently. In today's mortgage lending environment, obtaining a piggy back loan can be very difficult if a borrower has less than 20% for a down payment. In such instances, obtaining one mortgage with private mortgage insurance may be the only option. Also see Private Mortgage Insurance.

Private Mortgage Insurance

 

In the event that you do not have a 20% down payment, the lender may allow a smaller down payment, sometimes as low as 3.5%, or less with loans guaranteed through the VA or USDA. However, with a smaller down payment, borrowers are usually required to carry private mortgage insurance on the loan. Private mortgage insurance comes in several forms: upfront, paid at closing, and monthly. A lender may require some combination of both upfront and monthly mortgage insurance. The amount required is determined based on program type, property type, credit score and loan-to-value.

Title Insurance

 Title insurance protects a real estate owner or lender against any loss or damage they might experience because of liens, encumbrances, or defects in the title to the property, or the incorrectness of the related search. It protects against claims from various defects such as another person claiming an ownership interest, improperly recorded documents, fraud, forgery, liens, encroachments, easements and other items that are specified in the actual policy.

Underwriting

 

Approves (or declines) funding to potential home buyers, based upon factors such as credit, employment, assets, etc., and matches approved risks with appropriate rates, terms and loan amounts.

USDA Rural Home Loan

 

Along with loans guaranteed by the VA (see VA Loan below), loans guaranteed by the USDA remain one of the few nationally offered loan programs available with no down payment. While the program includes the word "rural" in its name, this is not necessarily the case with all properties. The program's requirements mandate that both the property and borrower must qualify. These requirements are dependent on the physical location of the property and the maximum household income. Ask your lender for details so you can determine if this type of program would be a good option for your situation.

VA Loan

 

***Please click on the links below to see the previous parts in this series***

Mortgage loans available to eligible US veterans. VA guaranteed loans are made by private lenders, such as banks or mortgage companies, for the purchase of a home for a buyer's own personal occupancy. These loans offer competitive rates and require little or no down payment.

Part 1: Rate Shopping

Part 2: The Nuances of Your Contract

Part 3: Origination Points

Part 4: Credit Scoring

 

Karl Peidl
Lincoln Mortgage Company
251 Bellevue Avenue, Suite 102
Hammonton, NJ 08037

kpeidl@supmort.com

609-878-7013

www.facebook.com/newjerseymortgages

 

 

 

 

Pennsylvania: Licensed by the PA Department of Banking as a First Mortgage Banker and licensed pursuant to the PA Secondary Mortgage Loan Act. New Jersey: Licensed by the N. J. Department of Banking and Insurance Maryland: Authorized Mortgage Lender by the State of Maryland Commissioner of Financial Regulation. Florida: Licensed Mortgage Lender by the Florida Office of Financial Regulation. Delaware: Licensed Lender by the Delaware Office of the State Bank Commissioner.

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