A mortgage is a loan taken out to purchase a home. The borrower puts up the title to that home as collateral. If the borrower doesn’t pay back the loan on time, the lender can foreclose on the home and sell it to pay off the loan. Anyone considering the purchase of a home should be very familiar with the terms and details of mortgages. ACCC has compiled the list below to help you get started.
Adjustable rate mortgage (ARM)
A mortgage in which the interest rate is not fixed but is tied to an index and is periodically adjusted as the rate index moves up and down. The initial rate is lower than the fixed rate mortgage. Such ARMs commonly provide for an option to convert to a fixed rate mortgage.
Amortization
A repayment method in which the amount you borrow is repaid gradually though regular monthly payments of principal and interest. During the first few years, most of each payment is applied toward the interest owed. During the final years of the loan, payment amounts are applied almost exclusively to the remaining principal.
Annual percentage rate (APR)
The actual cost of borrowing money, expressed in the form of an annual rate to make it easier to compare the cost of borrowing money among several lenders or sellers on credit. The APR includes all the financing costs of a mortgage, including points, origination fees and other finance charges and the mortgage interest.
Appraisal
A written estimate of a property’s current market value, based on recent sales information for similar properties, the current condition of the property, and how the neighborhood might affect future property value.
Balloon (payment) mortgage
A mortgage providing for specific payments at stated regular intervals, with the final payment considerably more than any periodic payments. Usually paid over a short term, such as five to seven years. This type of mortgage may be beneficial if you move before the final payment, as you can benefit from a slightly lower rate.
Closing Costs
Fees incurred in a real estate or mortgage transaction and paid by borrower and/or seller during the closing of the mortgage loan. These typically include a loan origination fee, discount points, attorney’s fees, title insurance, appraisal, survey, and any items that must be prepaid, such as taxes and insurance escrow payments. The cost of closing is usually about 3 percent to 6 percent of the mortgage amount.
Down Payment
The difference between the purchase price and that portion of the purchase price being financed. Most lenders require the down payment to be paid from the buyer’s own funds. Gifts from related parties are sometimes acceptable, and must be disclosed to the lender.
Escrow Account
Account held by a lender containing funds collected as part of mortgage payments for annual expenses such as taxes and insurance, so that the homeowner does not have to collect a large sum when these fall due.
FHA (Federal Housing Administration) mortgage
The Federal Housing Administration is a federal agency established by Congress in 1934. The FHA insures mortgage loans made by FHA approved lenders on homes that meet FHA standards. Generally FHA loans require lower down payments than conventional mortgages and have less stringent income requirements.
Fixed Rate Mortgage
A mortgage with an interest rate that remains constant for the life of the loan, generally repaid over 15 or 30 years.
Home Equity Line of Credit
A loan providing you with the ability to borrow funds at the time and in the amount you choose, up to a maximum credit limit for which you have qualified. Repayment is secured by the equity in your home. Simple interest (interest-only payments on the outstanding balance) is usually tax-deductible. Often used for home improvements, major purchases or expenses, and debt consolidation.
Home Equity Loan
A fixed or adjustable rate loan obtained for a variety of purposes, secured by the equity in your home. Interest paid is usually tax -deductible. Often used for home improvement or freeing of equity for investment in other real estate or investment. Recommended by many to replace or substitute for consumer loans whose interest is not tax-deductible, such as auto or boat loans, credit card debt, medical debt, and education loans.
Housing and Urban Development (HUD)
A U.S. government agency established to implement federal housing and community development programs; oversees the Federal Housing Administration.
Index
A published rate used by lenders to calculate interest adjustments on ARMs (Index + Margin = Interest Rate). Some indexes are more volatile than others. Common indexes include the Cost of Funds for the Eleventh Federal District of banks or the average rate of a one year Government Treasury Security.
PITI(principal, interest, taxes, and insurance)
These are items that are frequently included in the monthly mortgage payment to lenders. Some lenders may allow you to pay taxes and insurance yourself.
Point
A fee or charge equal to one percent (1%) of the principal amount of the loan which is collected by the lender at the time the loan is made. It is collected only once. Generally the lower the interest rate, the more points you’ll pay.
Prequalification
The process of determining how much money a prospective homebuyer will be eligible to borrow prior to application for a loan.
Prime Rate
Lowest commercial interest rate charged by a bank on short-term loans to its most credit-worthy customers.
Variable Rate
An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly.
