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HOME MORTGAGE DEFINITIONS
Borrowing money for a home is one of the largest financial steps you will take in your life. You will hear some unfamiliar words and phrases during the process. Some of these are listed and explained below:
Adjustable Rate Mortgage - Sometimes called simply an ARM. The interest rate and payment can adjust periodically, based on an index assigned at the time of the loan. You may have heard this type of loan termed a Variable Rate Mortgage.
Amortization - The payment in equal amounts of a loan over a stated period of time. An amortization schedule can be supplied so you can follow the payment and balance of your loan.
Annual Percentage Rate - The true cost of borrowing, using an annual rate. The formula for calculating the “APR” is set by federal law. This rate can be used by you in comparing different plans used by lenders. The finance charge on your loan is always included in this rate. Additional charges such as points, origination fees, mortgage insurance, and other prepaid finance charges add to the costs of your loan and are reflected in the APR.
Closing Costs - These are the costs incurred in buying or selling a property. Typical closing costs can be appraisal fees, credit reports, origination fees, points, title charges, filing fees, surveys, pest inspections, etc.
Construction Loan - A short-term loan, typically six months, to finance construction or renovation costs. This loan is typically a line of credit, with advances being made to pay costs as they are incurred. Upon completion of the project, the borrower would obtain a long-term loan to refinance the final amount due.
Debt-to-income Ratio - A ratio, expressed as a percentage, which is derived by dividing payments on long-tenor loans by the borrower’s gross monthly income.
Escrow - This is a neutral 3rd party who follows the instructions of both the buyer and seller to handle all the paperwork for the settlement or closing. This term may also refer to an account established by the lender into which the borrower deposits to pay taxes or insurance premiums.
Loan-to-value Ratio - This is a ratio expressed as a percentage, to compare the amount of your mortgage against the lesser of the sale price or appraised value.
Points - Sometimes called origination points or loan discount points, the point is prepaid interest charged by the lender at closing. One point is equal to one percent of the loan amount.
Private Mortgage Insurance (P.M.I.) - This insurance covers the balance of the loan and is typically required if the loan does not meet the typical loan-to-value requirements of the lender, usually a down payment of 20%. Utilizing this insurance coverage allows the borrower to pay less of a down payment and qualify for a loan otherwise not available. The fee for this insurance is paid in addition to the monthly principal and interest payment. Most lenders will require you escrow your real estate taxes and homeowner’s insurance while you are paying P.M.I.
Title Insurance - An insurance policy issued by a title insurance company which insures the buyer and/or lender against errors in the title search. The policy typically insures the buyer in the amount of the cost of the property and the lender for the full amount of the loan. For a purchase, the purchase agreement spells out who pays the cost of the title insurance. In a refinance situation, the borrower pays the cost for updating the insurance and issuance of the policy.
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