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30 Mortgage and Lending Terms You Should Know
Posted: February, 18, 2021 | Categories:
| By The Gove Group Real Estate, LLC
There is a lot of terminology when it comes to financing a home that is likely foreign to anyone not familiar with mortgages. That’s why we’ve put together a list of 30 terms to help you feel more confident going through the mortgage process.
Adjustable Rate Mortgage
An adjustable rate mortgage has variable interest rates. Typically that means you get a fixed interest rate for the first 1-7 years that is lower than the current market rate, and then after that, the interest rate is evaluated yearly. It could go up or down based on the current market rates.
Amortization refers to how loan payments are spread out over time and split to cover the principal and the interest. At the start of a loan, most of your payment goes toward the interest. As you pay off the loan, there will be less interest accumulating, so more of the payment goes toward the principal. An amortization schedule is a table that breaks down this split.
Annual Percentage Rate (APR)
APR is the total percentage of interest you’ll pay each year. It accounts for fees but does not estimate the compounding interest that will accumulate that year.
An appraisal is an estimate of how much a home is worth. Mortgage lenders typically require appraisals to ascertain that they are not lending more money for a home than what it is worth. They are conducted by a qualified appraiser who takes into account the home itself, the town/community, similar homes, and current market trends to determine the appraised value.
When you fill out a mortgage application, you will likely be asked to include all of your assets. This includes cash or cash equivalents (like money in a bank account), physical assets (homes, cars, boats), nonphysical assets (pensions, IRAs, bonds), liquid assets (readily tradable bonds or stocks), and more.
A Bridge Loan allows a buyer to use the equity of their existing home to buy a new home before the old one sells. It’s a temporary loan, typically for up to one year, and ideal for someone who is waiting for their previous home to close.
Closing costs are fees you pay to finalize your loan and close on a home. This includes everything from loan fees, the cost of the appraisal and home inspection, property taxes and HOAs, your real estate agent’s commission, and more. Most closing costs are paid at the closing itself, although a select few like appraisal and home inspection fees will likely be paid ahead of time.
Your closing disclosure is a document provided by your lender that maps out all the final terms of your loan, including the loan amount, interest rate, estimated monthly payments, and closing costs. You are legally required to have at least 3 days to review the closing disclosure before signing the loan.
A debt-to-income ratio compares how much you owe for debts each month to how much you earn. Debt includes monthly bills like your mortgage or rent, credit card debt, alimony or child support payments, and student, car, and other loans paid monthly. This total is divided by your monthly income to be represented as a percentage. The lower the percentage, the less risky you are to lenders.
Mortage Points / Discount Points
Generally, points are fees you pay to a lender to receive a lower interest rate. You pay more up front so that you have lower monthly payments and pay less interest over time, which is especially good for those who plan on keeping a loan long-term. It is important to consider the pros and cons of points versus a higher down payment.
A down payment is the first payment you make on a loan, typically represented as a percentage of the total loan. 20% down is traditionally considered the standard for how much to put down. While many loan types allow you to put less down, you will likely have to pay Private Mortgage Insurance (PMI) if you put less than 20% down.
Earned Money Deposit / Earnest Money
Earnest Money is a deposit you give to a seller when writing an offer on their home. This shows you are serious about the purchase. If your offer is accepted, the earnest money goes toward your down payment. The earned money deposit is typically 1-2% of the total cost of the home.
Home equity is the value you have in your home. This is essentially what your home is worth minus what you owe on it. As you pay off your home, your equity will increase.
Escrow is a legal arrangement in which a third party holds money in a separate, designated account while each party completes their contractual obligations.
An escrow holdback is when money is set aside at closing that will be released once repairs are finished. This incentivizes the seller to complete the repairs even though the home has already closed. This is a good compromise if last minute issues arise that would otherwise push back closing, and is often used in new construction when driveways and landscaping can’t be completed in the winter months.
An FHA loan is a mortgage insured by the Federal Housing Administration. This allows borrowers to finance for homes with much lower down payments than is considered standard – even as low as 3.5%. They are popular with first time home buyers.
Fair Market Value (FMV)
FMV is the price a home would sell for under normal market conditions. It is essentially the actual worth of a home. This is slightly different from an appraisal, which takes into account the market conditions. FMV is used when determining taxes and insurance claims.
Fixed Rate Mortgage
A fixed rate mortgage has fixed interest rates. The interest is set according to market rates and will not go up or down as the market fluctuates.
Hard Money Loan
A hard money loan typically uses property as collateral. They are generally short term loans with high interest rates, and the lenders are typically individuals or companies since banks do not offer these types of loans.
A buyer will typically hire a home inspector to thoroughly inspect a home they’ve made an offer on and report any potential issues. This opens up the option for renegotiation if problems arise. Home inspectors are primarily concerned with any broken, defective, or hazardous issues with the home, and do not pay attention to cosmetic defects unless they pose a potential safety hazard (for instance, a large crack or water stain on a wall).
Homeowners insurance insures your home and belongings in case of certain events such as fire or burglary. While it is not legally required to have homeowners insurance, most lenders will require you to have some coverage for the length of your loan.
Preapproval is when you complete a full mortgage application and the lender verifies the information you provide. You then receive a preapproval letter which is an offer (although not a commitment) to a loan amount. If you are serious about buying a home, and you plan to buy quickly, you should get preapproved as soon as possible.
Prequalification is a process in which you get an estimate on what you might be able to borrow for a loan. It is much less thorough and less definite than a more formal preapproval process.
Private Mortgage Insurance (PMI)
PMI is a type of insurance you may be required to pay with certain loan types. Typically a lender requires PMI if you put less than 20% down on a home. It’s paid monthly with your mortgage to protect the lender.
Proof of Funds
Proof of funds is a document that verifies how much money someone has. This could be a bank statement, a certified financial statement or copy of a money market account, or a letter from your bank or financial institution.
Property Deed and Title
A property deed is a legal document that transfers ownership (title) from one party to another. It is a physical, tangible thing. Title, however, is conceptual. It refers to a legal right of ownership but does not exist as a record or document.
Seller concessions are closing costs that the seller has agreed to pay. They may pay for a certain percentage of the costs or certain items. This can be useful for buyers who are struggling to afford the up front costs of buying a home. However, there are legal limits to seller concessions so that they don’t affect the overall market.
Seller Financing / Owner Financing
Seller financing is when instead of getting conventional financing through a financial institution, the seller of a home offers financing to the buyer, usually including some sort of down payment and monthly payments.
Title Insurance may protect a lender or buyer in case issues with the title arise. This could be a number of unresolved issues during past ownership, such as unpaid taxes, liens (a legal claim against the property, typically because it’s being used as collateral), or conflicting wills. It typically covers ownership by another party, incorrect signatures or fraud, outstanding lawsuits, and more.
A VA loan is a type of loan issued by private lenders and backed by the U.S. Department of Veterans Affairs that helps veterans, active duty service members, and widowed military spouses buy a home. Two benefits of VA loans are that no down payment is required and buyers do not have to pay PMI.
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