The Ins and Outs of Mortgages
The Ins and Outs of Mortgages and Related Aspects
By Susan M. Keenan ©2008
Getting a home mortgage is one of the largest expenditures that anyone will ever take on. Understanding the terminology associated with home mortgages and loans is essential in selecting the specific mortgage vehicle for your needs. Many of the common phrases associated with home mortgages are explained below in alphabetical order.
What does acceleration clause mean?
The acceleration clause in a mortgage contract states that the entire balance of the debt is due and payable in full should the mortgagee default on the mortgage.
What does acquisition cost mean?
The acquisition cost combines the purchase price with the estimated closing costs of the home.
What is an adjustable rate mortgage?
An adjustable rate mortgage is also referred to as an ARM. This type of mortgage includes a lower initial rate of interest that changes after a predetermined time has passed and it is adjusted periodically. At that point, the interest rate increases according to predetermined conditions that were selected at the origination of the mortgage. This type of mortgage is also referred to as a variable mortgage.
What does amortization mean?
Amortization is the scheduled payment of a loan or debt through systematic monthly payments that are equal in value and continue on a scheduled basis (monthly) until the entire mortgage is repaid in full. The details for each payment over the course of the mortgage are listed in an amortization schedule. Additionally, the payments are separated into the portions allotted for the principal balance and the interest charged.
What does annual percentage rate mean?
The annual percentage rate is also referred to as the APR. As required by the Federal Truth in Lending Law, lenders must present potential borrowers with the APR or annual cost of the mortgage. The annual percentage rate should accurately reflect the cost of obtaining and holding a mortgage for an entire year. The APR is designed as a comparison tool so that potential borrowers can select the mortgage that provides the lowest annual cost, provided that they qualify for it.
What is an application fee?
An application fee is the amount that a lender charges the borrower to process his mortgage application. This fee does not include all of the costs associated with obtaining a mortgage, nor does it guarantee the borrower approval for the mortgage.
What does appreciation mean?
Appreciation is the term used to indicate the increases in the value of a property due to fluctuations in the market or improvements and renovations.
What are assets?
Assets are used to refer to any property of value.
What is an assumable mortgage?
An assumable mortgage is one in which the buyer can take over the existing mortgage when a property is sold.
What is a balloon mortgage?
A balloon mortgage is a mortgage that includes fixed monthly mortgage payments for a predetermined term or number of years. After this time has passed, the balance of the mortgage is due and payable in one lump sum or balloon payment. Typically, this final payment is very large. Borrowers who expect to come into a financial windfall years down the line might be interested in this type of mortgage.
What is a balloon payment?
A balloon payment is the final payment of a balloon mortgage. It is typically a sizeable amount.
What is a bankruptcy?
A bankruptcy occurs when a consumer declares that he can no longer pay his debts. This legal strategy requires the filing of paperwork. Bankruptcies negatively affect an individual's credit score.
What is the Best Faith Estimate?
The Best Faith Estimate is an estimate provided by the lender to the borrowers. It delineates an estimate of the total costs of securing the mortgage.
What is the bill of sale?
The bill of sale, a legal document, transfers the title to the property from one individual or entity to another.
What is a biweekly mortgage?
A biweekly mortgage is a mortgage that requires the borrower to make mortgage payments biweekly or every two weeks. This practice leads to the equivalent of thirteen mortgage payments per year, reducing the principal balance of the mortgage more quickly than twelve payments a year would.
What is a blanket mortgage?
A blanket mortgage implements the use of more than one property as collateral for the mortgage.
What is a bridge loan?
A bridge loan is used for short-term financing issues such as the acquisition of a mortgage prior to the acquisition of the funds intended to pay for the mortgage.
What does clear title mean?
A clear title is one for which no other owners have been found for the property and unexplained liens or legal issues do not exist.
What is the closing?
The closing is the term that refers to the final transaction relating to the transfer of the property and its title.
What are closing costs?
Closing costs are those that are paid during the finalization of the purchase of real estate, which is also referred to as the settlement. Typically, closing costs include such fees as an origination fee, recording fees, document fees, points, the cost of the title insurance for the property, the payment of real estate taxes either in repayment to the seller or for the escrow account, the cost of the title insurance for the property, fees for any surveys that have been taken, attorney fees (if applicable), and the repayment of real estate taxes. Closing costs can also include other fees such as the payment of insurance on the home. In some cases, the seller might actually pick up some of the closing costs for the buyers, depending on the agreement.
What is collateral?
Collateral is the property that is used to secure the mortgage. With home sales, the real estate property that has been purchased is used as the collateral for the mortgage. If the loan is not repaid in full, the home or real estate property is often repossessed by the lender to recover the debt.
What is a construction loan?
A construction loan is one that covers the cost of construction. It is usually a short-term loan that advances funds to the builder during the time the home or building is under construction.
What is a conventional mortgage?
A conventional mortgage is one that has no additional guarantees for repayment beyond the property itself. This means that no guarantees have been offered through FHA or the VA.
What is a conversion option?
Conversion options allow certain loans to be changed after their origination. Predetermined conditions must be met as required by the terms set up at the origination of the mortgage. Balloon loans and adjustable rate mortgages are examples of mortgages that have conversion options.
Why is the borrower's credit score important?
The borrower's credit score is important since it is used to help determine the worthiness of the borrower as a credit risk. Credit scores are based upon the current and past credit histories of consumers. The credit report includes information from many areas including credit card usage, bill payment history, loan history, bankruptcies, employment, and more. Credit scores assist lenders with the difficult task of determining the risk factor associated with specific borrowers.
What is a deed?
A deed is a legal document that indicates ownership of a piece of real estate. This document transfers the title of a property that changes hands from one owner to another.
What is a deed in lieu?
If the homeowner defaults on his mortgage and is faced with foreclosure, he can present the lender with a deed in lieu to cover his financial obligation to the mortgage. A deed in lieu allows the homeowner to avoid foreclosure and the stigma associated with it.
What is a deed in trust?
A deed in trust is used in some states instead of the term 'mortgage'.
What does defaulting on a mortgage mean?
If a homeowner defaults on his mortgage loan, he fails to make his monthly payments in full. In cases where the real estate taxes are collected along with the monthly mortgage payment, the homeowner also defaults on his real estate taxes when they become due.
What does delinquency with a mortgage mean?
In relation to mortgages, delinquencies refer to late payment of the monthly mortgage payments. It can also refer to the failure to pay at all.
What is a deposit as it relates to mortgages?
Deposits are presented in advance of the closing. They are given as security or as a guarantee that the potential homebuyer is serious about purchasing the home. The deposit is also referred to as the 'earnest money deposit'.
What does depreciation mean?
Depreciation is the term used to indicate the decreases in the value of a property due to fluctuations in the market or failure to maintain the property.
What is a down payment?
The down payment associated with a mortgage is the amount of money (whether cash or check) that the borrower pays towards the purchase price of the house or real estate property. Typically, the down payment is paid at the closing or settlement.
What is an easement?
In some cases, a piece of real estate might refer to an easement in the deed. The easement gives someone other than the owner access to the property. If the neighboring property does not have direct road frontage, the deed might list an easement for this property owner so that he can gain access to his property.
What does equity mean?
The equity of a home is the difference between the current market value of the property and the total amount borrowed on the property.
What is an escrow account?
In general, lenders set up an escrow account to hold money that has been collected each month along with the loan payment. It includes a percentage of the money that needs to be paid toward property taxes and insurance. The lender will then make the payments at the appropriate time.
What is Fannie Mae?
Fannie Mae is a short way of indicating the Federal National Mortgage Association or FNMA. It is a large supplier of mortgages for the entire nation.
What is the FHA?
The FHA or Federal Housing Administration is an agency of the United States Department of Housing and Urban Development or HUD. It guarantees certain loans obtained by qualified buyers.
What is a first mortgage?
Obviously, the first mortgage is the one that the borrower has taken out on the property before any other mortgages or loans. This mortgage or loan holds the primary lien against the property and the holder of this mortgage has first claim for repayment of the mortgage should the home go into foreclosure.
What is a fixed rate mortgage?
A fixed rate mortgage is also referred to as a traditional mortgage. This type of mortgage is one in which the mortgage payment is a specified amount that never fluctuates. The interest percentage charged against the borrowed amount remains the same throughout the term of the mortgage. The amount of the mortgage payment that goes toward the principal will gradually increase as the amount of the mortgage payment that goes toward the interest gradually decreases.
What is floating?
Floating is the term used to describe the borrower's strategy not to lock in the interest rate for the mortgage he has applied for.
What does forbearance mean?
Forbearance is the term used to define the postponement of the mortgage payments when a borrower is delinquent on his payments. The time between the origination of the mortgage and the final due date for repayment might also be lengthened.
What is a foreclosure?
A foreclosure is what occurs when the borrower can no longer meet his monthly mortgage payments. The lender typically sells the property so that he can recoup his investment.
What is a Good Faith Estimate?
The Good Faith Estimate is the same as the Best Faith Estimate. It is an estimate of what the settlement costs are going to be for the borrower.
What is the grace period?
Borrowers are usually permitted 15 days grace for making late mortgage payments without incurring a penalty such as a late fee.
Who is the grantee?
The grantee is the individual who is receiving the property in question.
Who is the grantor?
The grantor is the individual who is selling the property in question.
What is a home equity conversion mortgage?
A home equity conversion mortgage or HECM is also referred to as a reverse annuity mortgage. The homeowner receives cash on the basis of his existing equity in the home. This money does not have to be repaid until the homeowner no longer resides in the home.
What is a home equity line of credit?
A home equity line of credit or HELOC allows a homeowner to borrow money based on the existing equity in the home. This type of loan takes second place to an existing mortgage.
What is homeowner's insurance?
Homeowner's insurance is usually required by mortgage lenders to protect their investment. They are typically listed on the homeowner's insurance policy. The homeowner's insurance provides hazard insurance as well as liability insurance.
What is a homeowner's warranty?
A homeowner's warranty is an insurance policy on the home that covers certain types of repairs for a predetermined time.
Why do I need insurance?
Typically, lenders require that homeowners obtain homeowner's insurance as a way of safeguarding their investment. The lender is listed as the primary beneficiary on the insurance policy. Should the home be destroyed or damaged beyond repair, the lender can collect the balance of the mortgage from the insurance company.
What does interest on the mortgage mean?
The interest associated with a mortgage is the fee that the lender charges on a monthly or annual basis for loaning the money to the borrower. This fee is a percentage of the total amount that has been borrowed.
What is an interest only mortgage?
In an interest only mortgage, the borrower pays only the interest that is due on the mortgage for the first term of the loan. This term is predetermined at the origination of the loan. Ten-year terms are very common for this portion of an interest only mortgage. After this term has passed, the mortgage converts to a fixed rate mortgage with fixed monthly payments that include both the principal and the interest portions of the mortgage.
What is a lender?
A lender is the individual, bank, or company that is offering the mortgage to the borrower.
What does LIBOR index mean?
The LIBOR index stands for London Interbank Offered Rate Index. It refers to the average of the interest rates that international banks charge for borrowing United States dollars in the London market. It takes into consideration the rates charged by major banks only.
What is a lien?
A lien refers to a claim that one party has against another as security for a debt. In most cases, the lien is held against the property.
What is a late fee?
Late fees are monetary charges that are assessed on a mortgage debt to borrowers when they are late making their mortgage payments.
What is a lien?
When a homeowner borrows money using his home as collateral, a lien is created against the home for the value of the loan amount. Basically, it is a claim that is held against the property. The lien must be repaid whenever the home is sold or destroyed.
What is a loan balance?
A loan balance is the amount of money that it would take to satisfy the loan debt in full. It is often referred to as the principal amount plus the interest that is due.
What is a loan term?
The loan term varies from one loan to the next. It is defined as the number of years that a loan is going to be held or amortized. The most popular loan terms are fifteen, twenty, or thirty years.
What is a merged credit report?
A merged credit report is formulated from credit reports obtained from more than one credit bureau.
What is a mortgage?
A mortgage is a binding financial agreement between two parties, the mortgagee and the mortgagor. This legal transaction is a loan from one party to the other, typically for a piece of real estate.
Who is the mortgagee?
The mortgagee refers to the lender in a mortgage agreement.
What is a mortgage broker?
A mortgage broker is the individual or company that originates a mortgage or loan between the borrower and lender.
Who is the mortgagor?
The mortgagor refers to the borrower in a mortgage agreement.
What does negative amortization mean?
Negative amortization occurs when a borrower pays less than the amount due on a loan or mortgage. As a direct result, the loan balance does not decrease as it would otherwise with proper payments.
What is an origination fee?
Origination fees are those that the lender charges the borrower for processing his loan application.
What is owner financing?
Owner financing occurs when the seller finances the loan or mortgage. The mortgagor makes the payments for the loan to the seller who is also the mortgagee in this case.
What is PMI?
PMI is short for private mortgage insurance. This type of insurance is often required by the lender in order to protect his investment. PMI protects the lender's monetary investment in case the borrower goes into default on the loan. The payments for PMI are usually included with the monthly mortgage payment.
What are points?
Points are typically charged when a borrower acquires a mortgage. It is simply one of the fees associated with the process. In most cases, a borrower can pay additional points in order to obtain a lower interest rate. Each point is equal to 1 % of the amount of the mortgage. One example would be the following scenario. The borrower acquires a mortgage for $100,000 at 3 points. Since each point is equal to 1 % of the amount of the mortgage, the borrower owes $3,000 or 3% of the mortgage. The lender charges the points. Points can be negotiated by the lender and the borrower for a specific interest rate and term within the limits that the lender is offering.
What does prime rate mean?
Prime rate is the term used to describe the best or lowest interest rate, which is typically offered to borrowers with excellent credit histories.
What does principal mean?
The term, principal, is used to indicate the total amount of debt, not counting the interest charges that are due on it.
What are property taxes?
Assessed by local or state governments, property taxes are assessed on the value of the home. Homeowners pay these taxes on an annual basis according to a predetermined timeline.
What is a quitclaim deed?
A quitclaim deed is one in which the grantor transfers whatever rights he has in the title to a property. It does not provide a guarantee that no one else has any claim to the title.
What is a recording fee?
The recording fee is an additional charge that covers the cost to record the documents relating to the mortgage. Typically, this transaction takes place at a public office such as the recorder's office.
What is a reverse mortgage?
A reverse mortgage is one in which the homeowners receive money from a lender based on the equity of their home, which is used as collateral. Initially, they do not need to repay the loan. In fact, the loan is not repaid until the home is sold or the homeowner no longer resides in it.
What does refinance mean?
Refinance is the process that occurs when a borrower pays one loan off with the acquisition of a new one.
What is a secured loan?
A secured loan is one that is acquired by offering collateral for the loan. In the case of home mortgages, the home is offered as collateral or security for the loan.
What is a senior loan?
A senior loan is the loan that takes precedence over all other loans. In the event that the homeowner defaults, this loan is paid off first.
What is a tax lien?
A tax lien is placed against a property when unpaid taxes are past due.
What is a title?
A title is a legal document that indicates an individual's ownership of a specific piece of real estate.
What is a title company?
A title company performs searches on titles to properties to ensure that the individual who claims title to a property actually has it.
What is title insurance?
Title insurance protects the homeowner against any errors that occur during the title search. This includes disputes that might arise over property ownership. A fee is required to obtain title insurance.
What is a title search?
A title search is the actual process of checking records on the property in an effort to verify that the seller is the actual owner of the property.
What does transfer tax refer to?
Transfer tax is the tax that the state assesses when a title is transferred from one owner to another.
What is the Truth in Lending Law?
The Truth in Lending Law requires lenders to provide potential borrowers with the actual costs of borrowing money. The annual percentage rate is the figure that lenders provide to indicate the annual cost of obtaining a loan.
What is a variable rate mortgage?
A variable rate mortgage is another term for an adjustable rate mortgage. With this type of mortgage, there is a lower initial rate of interest that changes after a predetermined time has passed and is adjusted periodically.
Introductory blurb: Mortgages come in a variety of packages with a multiplicity of different terms. This document explains 88 of these mortgage-related words or phrases.