Mortgage Terms, Simplified.
First – what even is a mortgage? A mortgage is a type of loan that is secured against the value of your primary home or any other real estate you retain ownership of. Mortgages are offered at both fixed interest rates, which remain unchanged throughout the loan term, or at adjustable rates, which vary over a specific period of time. Typically, the repayment period of a mortgage loan ranges from 15 to 30 years, depending upon the type of loan you wish to have. For those not in the industry, the terms related to a mortgage transaction can be scary, but we’ve broken them down for you right here. Here’s a close look at some of the most popular mortgage-related terms that you’ll definitely hear if you’re seriously considering getting home financing.
The feeling you get when you do your mortgage with us and all of a sudden feel financially free to live your best life.
This refers to the process by which the principal and interest on a mortgage loan are paid throughout the term of the loan, in the form of scheduled and periodic installments. The repayment details are decided at the time of signing the loan document.
Annual Percentage Rate (APR)
The APR of a loan is NOT your interest rate. We repeat – the APR is NOT your interest rate! The APR simply refers to the cost of the loan as a percentage of the outstanding amount. Basically, this means that if you were to take the total cost of the loan and translate it into a yearly rate on the remaining balance, that’s the APR.
This is the fee that a lender charges in order to process a borrower’s loan application. Such cost is borne by the borrower.
In the case of a balloon loan, the monthly installments (or payments) are not sufficiently large enough to repay the entire loan at the end of the loan term, so the remaining balance at the end of the loan term is paid out as a lump sum amount.
These costs include all incidental charges relating to the sale of the real estate. In normal cases, closing costs include – but are not limited to – any lender fees, title transfer, attorney fees (if applicable), and money to be placed in escrow (also if applicable). These costs are paid at closing, and sometimes can be covered by the seller on a purchase.
Convertible Adjustable-Rate Mortgage
Convertible mortgages are fixed-rate loans. However, they offer you the flexibility to convert them into adjustable-rate loans at a specified time during the loan term.
Debt To Income Ratio
This is a ratio calculated when looking at the debts you have on credit + your proposed mortgage payment versus the gross monthly income that you make. There are certain Debt-to-Income Ratios for different loan programs lenders must adhere by.
Equal Credit Opportunity Act
Discrimination isn’t cool. The ECOA is an anti-discrimination federal law that prohibits lenders and all other creditors from refusing to grant credit to an applicant on the basis of the applicant’s race, national origin, gender, age, or marital status.
Fannie Mae is a popularly used acronym for the Federal National Mortgage Association (FNMA).
Federal Housing Administration (FHA)
The FHA is a governmental agency that operates, oversees, and monitors a wide variety of home loan programs and initiatives. FHA loans are known to carry low-interest rates and require minimum down payments.
This acronym stands for Federal Home Loan Mortgage Corporation Housing.
These financial tables are often used by lenders for calculating the interest rates for adjustable mortgages, as well as those on Treasury bills.
Interest Rate Ceiling
Fixated by regulatory authorities, the interest rate ceilings provide the highest interest rate that a lender can charge for any adjustable-rate mortgage offered. It represents the maximum income cap and profit margins for lenders.
This is a type of mortgage that requires you to repay only the interest that accrues on the loan balance at each payment period (usually per month). This means that the outstanding balance does not decline with each payment.
Mortgage Acceleration Clause
A clause in the mortgage agreement that enables the lender to demand the entire balance of the loan to be repaid as a lump sum payment in the event the house is sold or refinanced. The clause also applies in the instant that the borrower defaults or where the title of the property changes hands.
This refers to a fee charged by the lender for processing any mortgage loan. Our wonderful employees at Absolute Home Mortgage have to get paid somehow!
Points are associated with your interest rate. You can pay “points” – or a certain dollar amount – to get a lower interest rate. This is also known as “buying down the rate.” More simply, you can pay a fee to get a lower rate than what the current market is offering.
Private Mortgage Insurance (PMI)
PMI is a monthly charge added to your mortgage payment if you place a down payment of less than 20% of the home value or purchase price of the home. It protects the lender against you defaulting since there is less than 20% equity in the home at the time of your mortgage. Different loan programs warrant different PMI requirements, so call one of our Loan Officers to get the real deal on PMI.
These formulas are used by the lenders to estimate how much a potential buyer can borrow. In other words, qualifying ratios denote the affordability range of the buyer for the lender’s purposes.
Locking your rate is an option given to you during the loan application process to solidify the interest rate you will have for the life of the loan (on a fixed rate mortgage). Our Loan Officers watch the marketing closely and lock you in at the most opportune time for the best interest rate possible at the time of the loan process. Trust us; you’re in good hands.
This denotes an index used in determining the interest rate changes and movements in interest for all adjustable rate mortgages.
What Can a Loan Officer Help You With?
Our Loan Officers are here to advise and guide you into making the most important financial decision of your life – buying or refinancing your home. With us you can sit back, relax, and let our professionals handle it. Check out all of our loan options available to see what suits your goals.
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