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Twenty Terms You
Must Know and Understand Before You Sign Off On Your Mortgage!
Buying a home is a major achievement in most everyone’s life. Pride of
ownership, tax breaks and equity are just a few of the many benefits you’ll
enjoy with your new home. Your home purchase may also be one of the largest
investments that you will ever make.
During the emotional excitement of buying a home, you may encounter terms
with which you are unfamiliar. For some, it can be a bit embarrassing to ask
what they consider to be "too many questions." Others may make a note of their
questions but simply forget to revisit those points. To ensure that you have
complete confidence during your home loan process, invest a moment to read
this article and become familiar with the concepts and terms you will
encounter. Knowledge is power, and the more you know, the more successful
you will be with your decisions and the more soundly you will sleep at night having made
them.
Adjustable Rate Mortgage (ARM)
Also referred to as a Variable Rate Mortgage. A mortgage in which the
interest rate is adjusted periodically based on a pre-selected index.
Annual Percentage Rate (APR)
An interest rate that reflects the cost of a mortgage as a yearly rate. This
rate takes into account any points and fees, and is based on the loan going
to its full-term.
Assumption
An agreement between buyer and seller in which the buyer assumes
responsibility for the seller’s existing mortgage. This agreement usually
saves the buyer money because closing costs and the current interest rate,
which is possibly higher, do not apply.
Buy-down
A method of lowering the buyer’s monthly payment for a short period of time. The lender or homebuilder subsidizes the mortgage by lowering the interest
rate for the first few years of a loan.
Caps
A limit in the amount the interest rate or monthly payments for an
adjustable rate mortgage may change.
Closing
Also referred to as settlement. The meeting at the conclusion of a real
estate sale in which the property and funds are exchanged between the two
parties involved.
Debt-to-Income Ratio
The ratio, expressed as a percentage, which results from dividing a
borrower’s monthly payment obligation on long-term debts by the borrower’s
gross monthly income.
Discount Points
Prepaid interest assessed at closing by the lender. A point is equal to 1
percent of the loan amount.
Down Payment
Cash paid by the buyer at closing that makes up the difference between
the purchase price and the mortgage amount.
Earnest Money
Money given by a buyer to a seller as a deposit to commit the buyer to the
future transaction. Earnest money is subtracted from closing costs.
Equity
The value an owner has in real estate, over and above the obligation against
the property. Equity is fair market value minus the current indebtedness.
Escrow
Funds given to a third party which will be held to cover payments, such as
tax or insurance payments and earnest money deposits.
Fixed Rate Mortgage
A mortgage in which the interest rate remains constant throughout the life
of the loan.
Loan-to-Value Ratio
The ratio between the amount of the mortgage loan and the appraised value of
the property.
Market Value
The price that a property could possibly bring in the marketplace.
Mortgage Insurance
Insurance that protects lenders against loss if a borrower defaults. This is
required when the loan-to-value ratio is greater than 80 percent.
Origination Fee
A fee charged by a lender for processing a loan application; usually
computed as a percentage of the loan.
PITI
Refers to Principal, Interest, Taxes, and Insurance.
Underwriting
The decision-making process of granting a loan to a potential homebuyer.
Variable Rate Mortgage
Also referred to as Adjustable Rate Mortgage. A mortgage in which the
interest rate is adjusted periodically based on a pre-selected index.
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