How did you do with last week’s list of Mortgage terms? Did you learn something new or were they all familiar terms? Below are some new mortgage vocabulary terms for you to get familiarized with.
Interim Financing: A construction loan made during the completion of a building project. After completion of the project, a permanent loan typically takes the place of this loan.
Lien: A claim against property. Property is said to be encumbered by a lien and the lien must be removed to clear title.
Lifetime Cap: For an adjustable-rate mortgage (ARM), a limit on the amount that the interest rate or monthly payment can increase or decrease over the life of the loan.
Loan Origination Fee: This pays the administrative costs of processing the loan. Usually, it is expressed in points with one point being 1% of the mortgage amount.
Loan-to-Value Ratio (or LTV Ratio): The relationship between the loan amount and the value of the property (the lower of appraised value or sales price), expressed as a percentage of the property?s value. For example, a $100,000 home with an $80,000 mortgage has an LTV of 80 percent.
Lock-In: The lender guarantees a specified interest rate if a mortgage goes to closing within a set period of time through this written agreement. This typically specifies the number of points to be paid at closing as well.
Lock-In Period: The time period during which the borrower is guaranteed an interest rate by the lender.
Margin: For an adjustable-rate mortgage (ARM), the amount that is added to the index to determine the interest rate on each adjustment date, as stated in the note.
Market Value: The lowest price a seller would accept and the highest price that a buyer would pay on a property. The price a property could be sold for at a given time could differ from the market value.
Mortgage: A voluntary lien filed against a property to secure a debt, usually a loan.
Mortgage Banker: A company that originates and services mortgages exclusively for resale in the secondary mortgage market (to other lenders and investors). Certain mortgage bankers are subsidiaries of depository institutions or their holding companies but do not receive money from individual depositors.
Mortgage Broker: An independent professional or company that brings together borrowers and lenders for loan origination purposes, both in residential and commercial circumstances. Mortgage brokers typically charge a fee or require a commission for their services.
Mortgage Insurance (MI): Insurance that protects lenders against losses caused by a borrower’s default on a mortgage loan. MI typically is required if the borrower’s down payment is less than 20% of the purchase price.
Mortgage Insurance Premium (MIP): Insurance provided to the lender from the Federal Housing Administration (FHA) to cover an instance of the borrower defaulting on the mortgage. Borrowers pay one-half percent each month on FHA insured mortgage loans.
Negative Amortization: When a borrower’s monthly payments are not large enough to pay all the interest due on the loan. The unpaid interest then is added to the unpaid balance of the loan. Negative amortization can cause home buyers to owe more than the original amount of the loan.
Net Effective Income: The borrower’s gross income minus federal income tax.
Non-Assumption Clause: A portion of a mortgage contract prohibiting the assumption of the mortgage without the approval of the lender beforehand.
Origination Fee: Lenders charge the borrowers this fee to cover the services needed to take a loan application, process it, and prepare it for closing; it is typically computed as a percentage of the face value of the loan.
Paper Trail: Copies of all paperwork to cover the lender should the borrower default on the loan. Depending on the lender, this may be required from the borrower. It can include copies of all checks, deposit slips, loan paperwork, forms to liquidate assets, etc.
PITI: An acronym for the four primary components of a monthly mortgage payment: principal, interest, taxes, and insurance (PITI).
Pre-Payment: The ability established in the mortgage agreement for a borrower to make advanced payments before their due date.
Pre-Payment Penalty: A fee that a borrower may be required to pay to the lender, in the early years of a mortgage loan, for repaying the loan in full or prepaying a substantial amount to reduce the unpaid principle balance.
Prepaid Expenses: Needed to create an escrow account or to adjust the seller’s existing escrow account; taxes, hazard insurance, private mortgage insurance and special assessments can be included in the prepaid expenses.
Prequalification: A preliminary assessment by a lender of the amount it will lend to a potential homebuyer. The process of determining how much money a prospective home buyer may be eligible to borrow before he or she applies for a loan.
Principal: The amount of money owed on a loan, excluding interest. Also, the part of the monthly payment that reduces the remaining balance of a mortgage.
Private Mortgage Insurance (PMI): Insurance coverage required for expenses incurred if the borrower defaults on the loan. Borrowers typically are required to carry private mortgage insurance when they have a small percentage of a down payment to offer. An initial premium payment of 1% to 5% of your mortgage amount will be required. Private mortgage insurance also may necessitate an additional monthly fee depending on the borrower?s loan structure.
Recording Fees: A lender is paid this money for recording a home sale with the local authorities; this makes it part of the public records.
Refinance: Acquiring a new mortgage loan on a property already owned; this usually is done to replace an existing loan on the property (often to benefit from a lower interest rate).
Rescission: The cancellation of a contract. In regard to mortgage refinancing, by law the homeowner has three days to cancel the new loan if the agreement uses equity in the home as security.
RESPA: Real Estate Settlement Procedures Act. Through this, lenders are obligated to disclose information to potential customers throughout the mortgage process. By doing so, it protects borrowers from abuses by lending institutions. RESPA requires lenders to fully inform borrowers about all closing costs, lender servicing, escrow account practices, and business relationships between closing service providers and other parties to the transaction.
Second Mortgage: A mortgage that has a lien position subordinate to the first mortgage.
Simple Interest: Interest calculated only on the principle balance.