Thursday, July 23, 2015

Mortgage Jargon: 31 Commonly Used Terms

Each industry seems to have their own foreign language, terms that mean nothing to those who are not used to hearing it all the time. With the terminology used in discussing mortgages, such as appraisals, escrow, points and settlement costs, most people can easily become confused. When it comes to getting a mortgage loan at the Lake of the Ozarks, it's important to understand the meanings of all those mortgage terms. The decisions you make on your mortgage will affect you for years, so you want to make sure you know what you're doing. Here are some commonly used mortgage terms for you to brush up on before going in to apply for a Lake of the Ozarks home loan:

1. Adjustable Rate Mortgage (ARM) - a mortgage that has a fixed rate of interest for only a set period of time, typically one, three or five years. During the initial period the interest rate is lower, and after that period it will adjust based on an index. The rate thereafter will adjust at set intervals.

2. Annual Percentage Rate - the rate of interest that will be paid back to the mortgage lender. The rate can either be a fixed rate or adjustable rate.

3. Amortization - a schedule on how the loan is intended to be repaid. For example, a typical amortization schedule for a 15 year loan will include the amount borrowed, interest rate paid and term. The result will be a month breakdown of how much interest you pay and how much is paid on the amount borrowed.

4. Appraisal - a written report by a qualified appraiser estimating the value of a property based on physical inspection and comparable houses that have been sold in recent times.

5. Balloon Mortgage - a loan that offers lower monthly payments for a specific period of time, which usually is anywhere from 3 years to 10 years. After that, a borrower must pay off the principal balance in a lump sum, or balloon payment.

6. Balloon Payment - a lump sum payment that is larger than the other, periodic payments. It pays off the remaining balance of a loan.

7. Bi-Weekly Mortgage - a type of mortgage in which you pay half of your normal payment every 2 weeks; this is the equivalent of 13 regular payments, which in turn will reduce the amount of interest you pay and pay off the loan earlier.

8. Closing Costs - expenses incurred by buyers and sellers when transferring ownership of property. Closing costs normally include an origination fee, attorney's fee, taxes, escrow payments, title insurance and sometimes discount points.

9. Collateral - property pledged as security to a debt. If the borrower fails to repay the loan, the lender may gain ownership of the collateral and sell it to recover the money.

10. Construction Mortgage - when a person is having a home built, they will typically have a construction mortgage. With a construction mortgage, the lender will advance money based on the construction schedule of the builder. When the home is finished, the mortgage will convert into a permanent mortgage.

11. Debt-to-Income Ratio - one of the numbers used to determine if the borrower will be able to repay the loan. The lender compares monthly expenses, including the new mortgage, to monthly income. The income figure is divided into the expense figure, and the result is displayed as a percentage. The higher the percentage, the riskier the loan is for the lender.

12. Down Payment - the amount of a property's purchase price that the buyer pays in cash and does not finance with a mortgage. Generally, lenders require a specific down payment in order to qualify for the mortgage. You can often lower your mortgage payment or afford a more expensive house by putting more money down.

13. Equity - the difference between the value of the home and the mortgage loan is called equity. Over time, as the value of the home increases and the amount of the loan decreases, the equity of the home generally increases.

14. Escrow - at the closing of the mortgage, the borrowers are generally required to set aside a percentage of the yearly taxes to be held by the lender. On a monthly basis, the lender will also collect additional money to be used to pay the taxes on the home. This escrow account is maintained by the lender who is responsible for sending the tax bills on a regular basis.

15. Fixed-Rate Mortgage - a mortgage where the interest rate and the term of the loan is negotiated and set for the life of the loan.

16. Foreclosure - the legal process by which a homeowner in default on a mortgage is deprived of interest in the property. This usually involves a forced sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt.

17. Good Faith Estimate - an estimate by the lender of the closing costs that are from the mortgage. It is not an exact amount, however, it is a way for lenders to inform buyers of what is needed from them at the time of closing of the loan.

18. Homeowners Insurance - an insurance policy that includes hazard coverage, covering loss or damage to property, as well as coverage for personal liability and theft.

19. Interest-Only Mortgage - An adjustable-rate mortgage that allows borrowers to pay only the interest for a specified period of time. Interest-only mortgages are considered risky.

20. Jumbo Mortgage - A mortgage that exceeds the conforming limit. The single-family limit changes annually. Rates on jumbo mortgages tend be 1/8 to 1/4 of a percentage point higher than comparable conforming mortgages.

21. Loan-to-Value Ratio - this calculation is done by dividing the amount of the mortgage by the value of the home. Lenders will generally require the LTV ratio to be at least 80% in order to qualify for a mortgage.

22. Margin - the amount of percentage points, or spread, added to the index to come up with the rate your adjustable-rate mortgage will charge after each adjustment.

23. Origination Fee - when applying for a mortgage loan, borrowers are often required to pay an origination fee to the lender. This fee may include an application fee, appraisal fee, fees for all the follow-up work and other costs associated with the loan.

24. Points - are percentage points of the loan amount. Often in order to get a lower interest rate, lenders will allow borrowers to "buy down" the rate by paying points.

25. Pre-Payment Penalty - a fee charged to borrowers who pay a loan off faster than the prescribed payment schedule. Make sure to talk to your Lake of the Ozarks mortgage lender to see if prepayment penalties are allowed where you live and, if so, how large they can be.

26. Principal - the term used to describe the amount of money that is borrowed for the mortgage. The principal amount that is owed will go down when borrowers make regular payments.

27. Private Mortgage Insurance - a monthly premium that ensures the lender that until the borrower reaches 80% LTV, they are covered from default. When the loan-to-value (LTV) is higher than 80% lenders will generally not be able to do the transaction without the borrower purchasing PMI.

28. Settlement Costs - prior to closing, the attorneys involved in the mortgage closing will meet to determine the final costs that are associated with the loan. These settlement costs are given to all parties so that they will be prepared to pay the closing costs that have been agreed upon.

29. Title Insurance - insurance on the property that ensures the home is free and clear of any liens which could jeopardize the mortgage. Since the lender is using the home as collateral for the mortgage transaction, this title insurance is important and required.

30. Truth in Lending - a federal mandate that all lenders must follow. There are several important parts to the Truth In Lending regulations including proper disclosure of rates, how to advertise mortgage loans and many other aspects of the lending process. These regulations were put into place to protect consumers from potential fraud.

31. Two-Step Mortgage - a home loan that features a fixed rate and payment for an initial period, followed by one adjustment, then a fixed rate and payment for the remainder of the loan term.

While it is important to be familiar with these terms, there's no need to worry. As your mortgage lender at the Lake of the Ozarks, I will make sure you understand everything about the mortgage process and that you're making the best decisions for your situation. Contact me at 573-746-7211 about a new home loan today!

For Lake area news, resources and tips on financial services, please 

Michael Lasson
Sr. Residential Mortgage Lender
NMLS #: 493712

2265 Bagnell Dam Blvd, Suite B
PO Box 1449
Lake Ozark, MO 65049

Direct:  (573) 746-7211


**The postings on this site are my own and do not necessarily represent First State Bank of St Charles’s positions, strategies, or opinions.

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