Basic Mortgage Terms Everyone Should Know
Acquiring a mortgage is a big step in anyone�s life. Knowing
the terminology that is associated with a mortgage is the first
step in making the right decision when selecting a mortgage type
and term. Common terms are explained in the following sections.
What is amortization?
Amortization is the payment of a loan or debt through
systematic payments that continue on a scheduled basis until
the loan is repaid in full. An amortization schedule lists each
payment and its details for the life of the loan. It indicates
the total payment amount and breaks that amount into the
portion that is applied to the principal, as well as, the
interest.
What is an adjustable rate mortgage?
An adjustable rate mortgage, also known as ARM, is one in which
the interest rate fluctuates according to predetermined
conditions set at the time the loan is arranged.
What is a balloon mortgage?
A balloon mortgage is one in which fixed payments are made for
a predetermined number of years and then is paid off in full.
This final, single payment is considerably large and referred
to as the balloon payment. This type of loan is popular with
individuals who are expecting to come into some money later in
time, such as an inheritance or the sale of other property.
What are closing costs?
The closing, known as settlement, is the finalization of the
purchase of real estate. The costs that are associated with
this are known as closing costs. Closing costs will include
recording fees and documents, the origination fee, charges for
surveys that have been taken, points, the cost of the title
insurance, attorney fees (if an attorney is used), the cost of
the title insurance, payment of real estate taxes, and payment
of insurance on the home. Closing costs may include other fees.
Additionally, the seller occasionally pays some of the costs for
the buyer, but this is prearranged prior to the actual closing
itself.
What is collateral?
Collateral is property that has been offered to secure the
loan. Usually, the real estate that is being purchased is used
as the collateral, since it can be repossessed if the loan
payments are not made or the loan is not repaid in full.
What is a conversion option?
A conversion option allows certain loans to be changed. Certain
conditions must be met.
Balloon loans and adjustable rate mortgages can be changed into
fixed rate mortgages under these conditions.
Why is my credit score important?
A credit score is a rating given to a person based upon the
individual�s current and past credit history. It is calculated
for the purpose of determining an individual�s credit
worthiness. It will include information gleaned from credit
card usage and payment history, past mortgage history, other
bank loan history, and any other financial matters.
A credit score assists the lender in determining the risk
factor, if any, in lending money to the individual.
What is default?
Default is the failure to make the mortgage payments or to pay
the property taxes on the real estate in question.
What is a down payment?
A down payment is the money, cash, or check that an individual
pays towards the purchase price of the house. This is not
financed.
What is an escrow account?
In general, lenders set up an escrow account to hold money that
has been collected each month along with the loan payment. It
includes a percentage of the money that needs to be paid toward
property taxes and insurance. The lender will then make the
payments at the appropriate time.
What is a first mortgage?A first mortgage is the one that has the primary lien against
the property. The holder of the mortgage has first claim for
repayment.
What is a fixed rate mortgage?
A fixed rate mortgage, also known as a traditional mortgage, is
one in which the mortgage payment is set and never fluctuates.
The interest percentage remains the same throughout the loan�s
term. While the payment remains the same, the amount of money
that goes toward the principal gradually increases as the
amount that goes toward the interest gradually decreases.
What is floating?
If the purchaser decides not to lock-in the interest rate at
the time they apply for the loan, this is known as floating.
What is a Good Faith Estimate?
A Good Faith Estimate is an estimate of what the settlement
costs at closing will be for the borrower of the loan.
Do I need insurance?
Lenders require that insurance be held on the home, and that
they are listed as beneficiary on this insurance. It is their
way of guaranteeing that they will not lose any money should
the home be destroyed, damaged, or any liability claims are
placed against the homeowner. The insurance claims are subject
to the predetermined conditions of the insurance.
What is Interest?
Interest is the amount of money that a lender, usually a bank,
charges for loaning money.
What is an interest only mortgage?
An interest only mortgage is one in which the borrower pays
only the interest due for the first term of the loan. This
often allows first time purchasers the ability to buy a home in
a higher price range. After a predetermined number of years, the
loan becomes a fixed rate loan in which the borrower pays the
interest and principal for the remaining duration of the
mortgage.
What are points?
Points are equal to 1 % of the amount of the loan. For
clarification purposes, consider that the amount of the loan is
$100,000. One point is equal to $1,000 or 1% of the loan. If
three points are charged, they are equal to $3,000. The lender
who is making the mortgage loan charges points. Points are
negotiated along with the interest rate and term of the loan.
Occasionally, points are credited to the borrower.
What is a late fee?
A late fee is a small monetary charge that is assessed to a
borrower who is late making a mortgage payment.
What is a lien?
A lien is created when a person borrows money using the home as
collateral. It is a claim against a property that needs to be
repaid whenever the home is sold.
What is a loan balance?
The loan balance is the amount of money that is remaining to be
paid. It is the principal balance that has not been paid yet.
What is a loan term?
The loan term is the number of years that the loan is held or
amortized. Generally, loan terms of fifteen, twenty, or thirty
years are popular.
What is an origination fee?
An origination fee is a charge that a lender charges to process
the loan application.
What is PMI?
PMI, otherwise referred to as private mortgage insurance, is
insurance or protection against default by the homeowner. It
protects the lender from a loss of his monetary investment. The
borrower purchases this insurance from a private insurance
company and the premiums are usually included with the mortgage
payments.
What are property taxes?
Property taxes, assessed by local or state governments, are
taxes assessed on the real estate. The homeowner must pay these
annually.
What is a recording fee?
A recording fee is a charge to record documents. The documents
are a matter of public record and therefore, must be included
in public records. A recorder�s office handles the transaction.
What is a reverse mortgage?
A reverse mortgage allows homeowners to receive a sum of money
from a lender that they do not need to repay. The equity of the
home is used as collateral. The loan is repaid when the home is
sold. Three different types of reverse mortgages exist and they
are popular with senior citizens.
Being well-informed is equivalent to being well-prepared. A bit
of careful research and comparison shopping is all that is
necessary before selecting the right mortgage for you.
About The Author: Steve Baik is a contributing editor for
multiple websites related to credit and personal finance. He is
the chief editor for http://www.creditservicer.com. He also
edits part-time for http://www.apexcreditcards.com and
http://www.dollarguides.com.
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