Understanding Mortgage Terms...

The language used in securing a home mortgage is quite probably unfamiliar to you unless you work in the financial field. This brief glossary is provided to help you understand some of the more common verbiage used during the application, selection, processing and closing of your mortgage loan.

GLOSSARY

Financial Terms and Definitions so you can speak the 'Language of Lending'

Adjustable Rate Mortgage (ARM):
A mortgage loan that permits the lender to periodically adjust its interest rate on the basis of the movement in a specified index.

Amortization:
Gradual debt reduction. The reduction is usually made according to a pre-determined schedule for installment payments.

Annual Percentage Rate (APR):
The cost of obtaining credit, expressed as a yearly rate, taking into account the interest rate, points and certain loan fees.

Appraisal:
A formal, written estimation of the current market value of a home. A professional appraiser computes a fair estimate of market value based on the home's condition and the prices of comparable homes recently sold in the area.

Closing:
The end of a transaction. In real estate, closing includes the delivery of a deed, financial adjustments, the signing of notes and the disbursement of funds necessary to the sale or loan transaction.

Closing Costs:
All of the costs to the buyer and seller individually that are associated with the purchase, sale or financing of property, including, but are not limited to, prorating of agreed-upon items such as taxes, the cost of title insurance policies, the cost of credit reports, recording fees and escrow fees.

Contract for Purchase and Sale:
A contract between a purchaser and a seller of real property to convey a title after certain conditions have been met and payments have been made. Also referred to as a purchase agreement.

Credit Rating:
A rating given to a person to establish ability and willingness to pay obligations based upon present financial condition, experience and past credit history.

Credit Report:
A written report from a credit rating agency summarizing a person's credit history.

Debt-to-Income Ratio:
Total debt expenses as a percentage of gross monthly income. Lenders use this ratio to qualify borrowers for mortgage loans.

Down Payment:
A difference between the sale price of real estate and the mortgage loan amount.

Equity:
Your equity in your home is the difference between the remaining balance owed on your mortgage loan and the appraised value of the home. Your equity increases if your home increases in value and as you make your monthly payments of principal and interest. The principal portion of your payment is used to repay the amount you borrowed.

Escrow or Impound Account:
The portion of a monthly mortgage loan payment held by the lender/servicer to pay for taxes, hazard insurance, mortgage insurance or other items as they become due.

Escrow Agent/Title Agent/Attorney:
Assures that all documentation related to the sale of a house has been completed properly, including the title search and title insurance. The escrow agent/title agent/attorney explains all closing documents to the buyer and the seller, obtains their signatures where necessary and records the documents.

FHA/Federal Housing Administration:
A division of the Department of Housing and Urban Development. The FHA's main activity is insuring residential mortgage loans made by private lenders.

First Trust Deed Loan:
A mortgage loan that creates a lien against real property that is prior to any other lien on the property (other than the lien for real property taxes).

Fixed Rate Mortgage Loan:
A mortgage loan in which the interest rate and payment amount are the same for the entire term of the loan.

Homeowners Insurance Policy:
An insurance policy that combines personal liability insurance and hazard insurance coverage for a residence and its contents.

Housing Expense Ratio:
A homeowner's monthly housing expense, excluding utilities, as a percentage of his or her gross monthly income.

Interest:
Money paid for the use of money.

Loan-to-Value:
The relationship between the amount of a home loan and the value of the property. For example, if you have a loan of $95,000 on a home that costs $100,000, the loan-to-value ratio is 95%.

Lock-In Rate:
A commitment from a lender to make a loan at a pre-set interest rate at a future date, usually between 15 to 60 days. A fee may be charged to lock in a rate

Mortgage:
A formal document executed by an owner of property pledging that the property is security for payment of a loan. This document creates a lien on the property.

Mortgage Insurance:
Mortgage insurance makes it possible to buy a home with less than 20 percent down. It allows lenders to recover part of their financial losses if a borrower fails to fully repay a mortgage loan.

PITI:
The elements-principal, interest, taxes, and insurance-that are the components of most mortgage payments.

Points:
A dollar amount paid to a lender, typically to obtain a lower interest rate. One point is equal to one percent of the loan amount.

Principal:
The original balance of money loaned, excluding interest. Also, the remaining balance of a loan, excluding interest.

Settlement Costs:
Money paid by borrowers and sellers to effect the closing of a mortgage loan. This normally includes origination fees, discount points, title insurance, and prepaid items such as taxes and insurance.

Tax and Insurance Impounds:
One month's worth of your yearly tax bill and your yearly homeowner's insurance premium will be added to your loan payments. As an example, if your property taxes are $2,000 per year and your insurance premium is $600, one month's worth (1/12th) of each is $167 and $50. The lender collects these with your monthly payment and holds them in a special account ("an impound account"). The money in the account will be used to pay your taxes and insurance premiums when they become due. Here's why taxes and insurance are collected along with your principal and interest payments: If your taxes are left unpaid, your state can foreclose on your property in order to obtain payment. If the foreclosure is successful, the lender could lose his collateral. In other words, if you're not making your payments, the lender could not recoup his loss: the state's foreclosure would supercede his. The lender also wants to make sure your insurance premium is always paid. If a fire destroys his property, he'll have lost his collateral, but the insurance company should repay his loan.

Title:
The right to ownership in property. In the case of real estate, the documentary evidence of ownership, or title, is a deed. Title may be acquired through purchase, inheritance, gift or through foreclosure of a mortgage.

Title Insurance:
Insurance that provides for the payment of specific amounts (up to the policy limits) for loss caused by defects in the title to real estate.

Underwriting:
The analysis of the risk involved in making a mortgage loan to determine whether the risk is acceptable to the lender.Underwriting involves the evaluation of the property as outlined in the appraisal report, and of the borrower's ability and willingness to repay the loan.

VA/Veterans Administration:
An independent agency of the federal government, created in 1930. The VA home loan guaranty program is designed to encourage lenders to offer long-term, low down payment mortgages to eligible veterans by guaranteeing the lender against loss.

Property Taxes:
Usually, a set percent of your property's value is the amount owed as property tax. The amount owed varies significantly from area to area and is if you need help estimating your yearly property taxes; please contact your county assessor's office.