Buying a new home is one of the most confusing and difficult tasks a person can handle in his entire life. Every person wants to get a perfect living place for his family along with other comforts. And to achieve that goal, mortgage is essential. Unfortunately, you might find mortgage process much more confusing than finding the home. There are many factors associated with mortgage process which may influence your finances.
So, as a layman, you can not expect to understand the terminology which real estate agents or lenders might use. Terms like equity, closing, appraisal, escrow..etc are normally used by these mortgage professionals and it is much unique than the words people normally speak. If you want to understand every aspect of your mortgage deal clearly, make sure you know the meaning of some commonly used mortgage terms first.
Let us check the mortgage-glossary & know the words often used by the mortgage specialists :
Adjustable rate mortgage (ARM) – It is a mortgage loan with lower interest rate initially. The rate of interest can vary at any time of the loan-period depending upon market situations or standard financial index.
Annual percentage rate (APR) – A method of calculating the mortgage cost. It will include annual interest, mortgage insurance premiums & part of credit costs. It is either fixed or variable in nature.
Amortize – It is the method of payment scheduling. You will be paying the mortgage loan through a regular payments & at the end of the loan-term the mortgage loan balance will be nil.
Appraisal – It is a process where a qualified appraiser evaluates the property & gives a certificate of the appraised value to the owner. Physical inspection of the house or property is required for this process
Bi-Weekly Mortgage – It is a payment method of mortgage loan. You will pay half of your monthly payments in two weeks gap, that means - 13 monthly payments in a year. Gradually the interest rate will decrease as well as the loan term.
Balloon mortgage – It is a type of mortgage loan where the borrower will be allowed to pay lower monthly payments for a certain time , mostly 3 to 10 years. When the time ends, the borrower must pay a lump sum money as a part of the principal amount.
Buy-down Mortgage - It is a mortgage loan where a big amount is paid by another person apart from the buyer. As the loan due balance is lower, the monthly payment is also lower for the homeowner.
Closing cost – The cost payable by the buyer and seller for transferring the ownership of the property. It includes origination fee, attorney fee, recoding fee, taxes, escrow payments, title insurance, discount points etc.
Collateral – The property deposited to secure the mortgage. If the borrower can not pay the loan amount, the lender may occupy the collateral & sell it to recover the money.
Collection – The process by which the mortgage company intend to collect past due payments.
Down payment – It is a part of selling price of the property, which needs to be paid through cash. Lenders require 5% to 20 % down payment in different loan cases. The more you pay the downpayment initially, the less you'll have to pay as interest. If you pay 20% or more as downpayment, you don't have to pay extra money as private mortgage insurance.
Debt-to-income Ratio – The lender considers this ratio to judge the borrower's payment capability. The lender compares monthly mortgage payments with the borrower's monthly income. The monthly income is divided by the monthly expense (debt), and the result will be shown as a percentage. If the percentage gets lower, it will be much secure for the lender to issue the loan.
Deed of the loan – The legal document where the ownership of the property is stated clearly. There will be two or more parties added in the deed as per the deal.
Escrow account – A third party will hold the documents and money of this account. At closing, borrowers normally pay a certain amount along with the monthly payments. This money is transferred to escrow account & from that fund the yearly property taxes & other expenses are met.
Equity – It is the monetary difference between the property's market value & the loan amount. As long as the borrower keeps paying the monthly payments, the equity value will increase gradually.
Fixed rate mortgage (FRM) - In this mortgage, the interest rate remain unchanged till the loan-period completes. The loan-term may be of 15, 30, 40 or 50 years which is much more affordable than ARM.
Foreclosure – If the borrower fails to pay the due monthly mortgage payments for a long time , then the lender will initiate foreclosure process & the property will be sold to pay off the mortgage.
Good Faith Estimate (GFE) – It is an estimate of closing cost, done by the lender. It is an approximate value of the cost which lender informs the borrower.
Homeowners insurance policy – This policy covers hazardous loss and damage & theft during the loan-term. The lender must be assigned as loss payee.
Points – It is a certain percentage of loan amount paid to the lender along with monthly payments. Normally it is paid to reduce the interest rate of the loan.
Principal amount – It is the amount of money borrowed from the lender for home buying purpose.
Private Mortgage Insurance (PMI)– This insurance mainly secures the lender's interest. When borrower pays 19% or lower as down payment, the LTV ratio goes more than 80%. Then the lender asks the borrower to opt PMI.
Settlement costs – Before closing the mortgage, attorney determines the final costs associated with the mortgage.
Title insurance – The lender normally asks the borrower to get this insurance. Title insurance is a proof that the title of the property is clear from all liens & free.
These are some commonly used mortgage words which you can find out while dealing with a mortgage specialist. You can find more important mortgage-terms here. Know more mortgage oriented words & their definitions before engaging in any mortgage deal.