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Common Mortgage Terminology

Amortization—The schedule of loan payments that establishes the amount of payment to be applied to the principal and the amount to be applied to interest, usually on a monthly basis, for the full term of the loan.

Annual Percentage Rate (APR)—The TOTAL interest rate of a mortgage, including the stated loan interest as well as any upfront interest paid in securing the loan. The APR will invariably differ from the mortgage rate quoted due to the inclusion of these items.

Appraisal—An estimate of value of a Real Estate property by a professional third party. Virtually all non-owner financed mortgages will require an appraisal and is generally paid for by the buyer.

Adjustable Rate Mortgage (ARM)—A mortgage in which the interest rate is adjustable, meaning that the rate can go up or down according to prevailing financial market conditions.

Assessment—The value of a property as determined by the local tax jurisdiction which is used to determine the amount of your property taxes.

Comparable Market Analysis (CMA)—A comparison of the prices of similar houses in the same general geographic area. A CMA (sometimes called “comps”) is used to help determine the value of a property, either for a seller or a buyer.

Closing—The process that affects the final transfer of the deed from the seller to the buyer, as well as finalize all aspects of the mortgage of the property.

Closing Costs—Funds needed at the time of closing (separate from and in addition to the down payment). Loan origination fees, discount points, attorney fees, recording fees and pre-paids are some items that may be included. They often will total from 3% to 5% of the price of the home, payable in cash.

Contingencies—These are conditions—or “safety valves” written into Real Estate offers and contracts to prevent a buyer from being forced to buy a house that is unsatisfactory—either structurally or financially. Examples of contingencies are: “This contract is subject to the buyer obtaining a satisfactory whole house inspection”; or “Subject to the buyer being able to obtain a mortgage.”

Debt-to-Income Ratio—The ratio of a borrower’s total of debt as a percentage of their total gross income.

Deed—The document that, when recorded with your local government, determines ownership of a property. The deed is transferred from seller to buyer at closing (or settlement).

Earnest Money—Money that is submitted with an offer to purchase which indicates a buyer’s seriousness and good faith. In virtually all cases, earnest money will need to be submitted at the time of the offer and remains in escrow until the time of closing, at which time it becomes part of the down payment.

Equity—The difference between the value of a property and the total of any outstanding mortgages or loans against it.

Escrow—Funds held in reserve both prior to closing (for example the earnest money and deposit) by a third party and after closing by the mortgage company to pay future taxes and homeowner’s insurance. In some areas, “escrow” also refers to the closing process.

Fixed Rate Mortgage—A mortgage loan where the interest rate is established at its origination and continues unchanged through the life of the loan.

Foreclosure—The process through which a lender takes back property from a defaulting owner and re-sells it.

Good Faith Estimate—A written estimate of closing costs which a lender must provide you within three days of submitting an application.

Home Equity Line of Credit—A loan providing you with the ability to borrow funds at the time and in the amount you choose, up to a maximum credit limit for which you have qualified. Repayment is secured by the equity in your home. Simple interest (interest-only payments on the outstanding balance) is usually tax-deductible. Often used for home improvements, major purchases or expenses, and debt consolidation.

Home Equity Loan—A fixed or adjustable rate loan obtained for a variety of purposes, secured by the equity in your home. Interest paid is usually tax -deductible. Often used for home improvement or freeing of equity for investment in other real estate or investment. Recommended by many to replace or substitute for consumer loans whose interest is not tax-deductible, such as auto or boat loans, credit card debt, medical debt, and education loans.

Homeowners’ Association—An owners’ group, whether in a condominium, townhouse or single family subdivision that establishes general guidelines for the operation of the community, as well as its standards.

Inspection—A whole house inspection of a home being considered for purchase which looks for defects in the property.

Lien—A legal claim against a piece of property that can prevent it from being sold unless the lien is satisfied (paid off). Liens can be filed by unpaid contractors or other debtors in a legal process so that they will be paid when a property is sold.

Loan to Value Ratio (LTV)—A ratio determined by dividing the sales price or appraised value into the loan amount, expressed as a percentage. For example, with a sales price of $100,000 and a mortgage loan of $80,000, your loan to value ratio would be 80%. Loans with an LTV over 80% may require Private Mortgage Insurance, defined below.

Loan Origination Fee—A charge imposed by the lender, payable at closing, for processing the loan. See “Points.”

Lock-in—An agreement by the lender at the time of mortgage application or shortly thereafter, to write the mortgage at a specific interest rate, whether rates rise or fall up to the date of closing. Obviously a good move if rates are rising, not so good if they are falling. Lock-ins have specific expiration dates, such as 30, 60 or 90 days in the future.

LTV (Loan to Value)—The ratio of the amount of the mortgage as a percentage of the value of the property.

PMI (Private Mortgage Insurance)—Required on virtually all conventional loans with less than 20% down payment. Although the payments for PMI are included in your mortgage payment, it protects the lender should you default on the loan. On FHA loans, you will pay a MIP (Mortgage Insurance Premium) which accomplishes the same purpose.

Points—One point is equal to 1% of the loan value, paid at closing. Points can be loan origination fees or “discount points” which reduce the interest rate of the loan (you are actually paying a finance charge up front). When a lender, for example, quotes a rate of 8 1/2% with 1 + 1 points, 1 point is for the origination fee and 1 point is for the discount fee.

Prequalification—The first stage of a mortgage application where the lender will run a basic credit report and determine your debt-to-income ratio in order to see how much mortgage you qualify for.

Principal—The amount borrowed for a mortgage loan. Your monthly mortgage payment will be applied to both the interest and the principal (be assured though, that the lion’s share will go to the interest portion in the first years of the loan).

Property Tax—An annual or semi-annual tax paid to one or more governmental jurisdictions based on the amount of the property assessment. Generally paid as part of the mortgage payment.

Title Insurance—Protects your title—your ownership rights—from claims against it. Paid at closing, title insurance may be the responsibility of the buyer, the seller, or both, depending on what is traditional in your locality.