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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 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 bit embarrassing to ask what they consider 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 report and become familiar with
the concepts and terms you'll encounter.
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 it's 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, 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 home-builder subsidizes the mortgage by lowering
the interest rate for the first few years of a loan.
Caps
Also referred to as a Variable Rate Mortgage. A mortgage in which
the interest rate is adjusted periodically based on a pre-selected index.
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
Also referred to as a Variable Rate Mortgage. A mortgage in which
the interest rate is adjusted periodically based on a pre-selected index.
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
A method of lowering the buyer's monthly payment for a short
period of time. The lender or home-builder subsidizes the mortgage by lowering
the interest rate for the first few years of a loan.
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
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.
Loan-to-Value Ratio
The ratio between the amount of the mortgage loan and the
appraised value of the property.
Market Value
Prepaid interest assessed at closing by
the lender. A point is equal to 1 percent of the loan
amount.
Mortgage Insurance
Also referred to as a Variable Rate Mortgage. A mortgage in which
the interest rate is adjusted periodically based on a pre-selected index.
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
home-buyer.
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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