Learn all of these terms, and you’ll know more of the lingo than many people in the mortgage business! Then visit the WEOKIE Mortgage Center and search for your mortgage with confidence!
ADJUSTMENT INTERVAL—How often the rate changes in an ARM or adjustable rate mortgage. A hint: Some mortgage companies adjust rates upward quickly, but adjust them downward very slowly—they make you wait for the benefits of lower rates, but charge you rate increases virtually on the spot. Avoid these folks.
APPRAISALS or APPRAISED VALUE—What is something worth? In the mortgage world, only “certified” appraisals matter. Certified appraisals mean the appraiser has a license to provide this service.
ARM—Adjustable Rate Mortgage. A loan with a payment that adjusts up and down based on interest changes. ARMS vary widely in their features and attractiveness. To quickly learn the good and bad about ARMS, see ADJUSTMENT INTERVAL, TEASER RATES, FULLY INDEXED RATES, NEGATIVE AMORTIZATION, and DEFERRED INTEREST.
ASSESSED VALUE—The value used by your local county tax assessor to determine property taxes. Assessed values are seldom the real value of a property and generally GO UP when a property is sold—since the new assessed value is generally determined by the new selling price. See APPRAISALS
ASSUMABLE MORTGAGE— An assumable mortgage allows an approved buyer to “assume” your old mortgage, which can be an attractive feature if interest rates have gone up since you received your mortgage. Because Assumable Mortgages caused so many problems during the savings and loan scandal years ago, very few lenders offer any form of assumable mortgage now.
BALLOON LOAN—Watch out! These can be very dangerous. Balloons have lower payments than fixed loans, but end up with one whopping payment at the end. Occasionally, balloons can be valuable in certain circumstances.
BASIS POINT—A hundredth of one percent, sort of like the raise the boss wants to give you. Basis Points are generally used in the bond business to denote changes in the yield on bonds, which secure many mortgages. For instance, if the yield on a bond falls from 7 to 6.25 percent, it fell 75 basis points.
BRIDGE LOAN—A loan which lets you borrow some of the equity tied up in your current home, until that home sells. People generally use a bridge loan to help them buy a second house before their first house has sold. Bridge loans can be dangerous. We can tell you the pitfalls.
BUY-DOWN—Generally, when you pay more in “points” to get a lower loan rate. See POINTS
CAP—The minimum and maximum interest rates on an ARM. Believe it or not, a few loans have no maximum caps! Don’t get one of those.
CARM—Convertible adjustable rate mortgage. A CARM allows you to convert an ARM (an adjustable mortgage) to a fixed mortgage. CARMs are generally more expensive than an ARM—they usually start out higher than some other mortgages—and usually carry a conversion charge, which can run a percent or so. Use with caution.
CASH RESERVES—Enough money, after closing, to allow you to make a couple of mortgage payments and cover emergencies. Lenders require cash reserves.
CLOSING—The moment you’ve been waiting for! When the loan is funded and the deed is actually transferred between sellers and purchasers. Closing also means your mortgage payment is starting soon, if you’re the buyer!
CLOSING COSTS—Fees you pay to the lender for processing a mortgage loan and you pay to outside service providers. Can vary enormously between lenders, AND ARE NOT PART OF YOUR DOWN PAYMENT! This guide gives you a rundown on closing costs.
COFI—Literally, the “Cost of Funds Index,” an index used by some mortgage companies to determine the rate on your adjustable mortgage.
COMPARABLES—Other homes similar to a specific home in the same neighborhood. Comparables are used to determine the “market” value of a home.
CONDOMINIUMS—Usually apartments or other dwellings with adjoining walls or other common spaces. If you buy a condominium, you buy the space inside your walls and a portion of the common areas.
CONTINGENCIES—If you are a potential home-buyer, read this carefully! Conditions that have to be met before a contract can be enforced. If you are a buyer, for instance, make sure your purchase contract has a contingency clause that lets you out of the purchase if you can’t get financing.
CONVENTIONAL MORTGAGE—A mortgage not insured by a government agency.
COOPERATIVES—They may look like condominiums, but if you buy a cooperative you buy stock in the company that physically owns the property. Since cooperatives usually require board approval for you to buy, they can be harder to finance because they can be harder to resell.
CONFORMING LOANS—Mortgages that follow Fannie Mae and Freddie Mac guidelines, particularly in their size. (See FANNIE MAE, FREDDIE MAC, below) For instance, if the maximum loan Fannie Mae will approve is for $417,000, any loan under $417,000 is a “conforming” loan. If it’s over that amount, the loan is called, logically enough, a “non-conforming” loan, or a “Jumbo.” Conforming loans generally have a lower interest rate than non-conforming loans.
CREDIT REPORTING SERVICES—Equifax, TransUnion, and Experian are the big three credit reporting agencies, also known as credit bureaus. They collect and evaluate credit information on you, and sell that information to third parties.
DEED—The actual document which transfers ownership at closing from the seller to the purchaser.
DEED OF TRUST—What you get in many instances rather than a mortgage. Deeds of Trust introduce a third party into the lending scenario, a “TRUSTEE,” who holds the property in trust. Deeds of Trust are not necessarily bad, but many make it easier for a mortgage company to foreclose on your mortgage.
DEFERRED INTEREST—A very dangerous situation, indeed. Deferred interest happens when you have an ARM, an adjustable rate mortgage, which doesn’t raise payments when interest rates go up, but instead simply adds the cost of the additional interest to your mortgage—as a consequence, your mortgage principal goes up even if you make your payments! Stay away from these.
DISCOUNT POINTS—What you pay at closing to get a lender to lower your interest rate. See “POINTS.”
DOWN PAYMENT—The money you use to lower the amount due on a purchase. We always recommend you make bigger down payments, if you can.
DUAL AGENT—A real estate agent that represents both the seller and buyer in the same transaction. Generally speaking, be careful of “dual agent” transactions.
ESCALATION—You don’t want to ever see this word in a letter from your lender—Escalation means the lender is demanding the total repayment of your mortgage, virtually always because you’re way overdue in your payments. You’re in default.
ESCROW—Accounts established by neutral third parties to hold money for a seller or buyer. Your down payment or earnest money can go into an escrow account. Some people call these IMPOUND ACCOUNTS.
FHA MORTGAGE—When the Federal Housing Administration guarantees a loan by a lender. FHA mortgages were designed for persons with low income, generally, and for many first-time buyers. Because the FHA guarantees payment, FHA mortgages usually require a lower down payment, and may have a lower interest rate. All FHA mortgages require mortgage insurance.
FANNIE MAE—The government-sponsored organization that sets standards for mortgage loans, purchases mortgages, and resells an interest in them to investors. Mortgages that follow Fannie Mae guidelines are usually cheaper. See also FREDDIE MAC.
FIRMs—Fixed Interim-rate Mortgages. Generally 30-year mortgages that are fixed for a number of years, then become ARMs, or adjustable-rate mortgages. The adjustable portion of FIRMs is usually tied to the price of one-year treasury bills. For instance, FIRMs generally come in four loan periods, 3, 5,7, and 10 year fixed payments, and then variable payments for the remainder of the 30 years. These loans are also called “3/1”, “5/1”, “7/1” and “10/1” loans.
FSBO—Actually pronounced “Fizbow.” A FSBO home sale simply means “For Sale By Owner.” No real estate agent is involved.
FIXED RATE MORTGAGE—The interest rate remains unchanged throughout the length of the loan. Fixed rate mortgages generally cost more than the first years of an ARM, or adjustable rate mortgage.
FORECLOSURE—You don’t want to ever go there! Foreclosure is when the lender legally seizes a property on which the mortgage is in default. Foreclosure happens when you get behind on your payments, can’t honor your “escalation” clause (which says you have to pay off your mortgage right now), and are generally on your last leg, financially—and when you don’t plan carefully. A WARNING: Some foreclosures happen quicker than others. For instance, if your mortgage company uses a “deed of trust,” that company generally doesn’t have to go to court to foreclose on your property. Rules vary on foreclosure state-to-state.
FREDDIE MAC—A cousin of FANNIE MAE, Freddie Mac is the Federal Home Loan Mortgage Corporation. Its mission is to purchase loans, and help the average homebuyer.
FULLY INDEXED RATE—You really need to understand this term! Fully indexed rates tell you what an ARM, an adjustable rate mortgage, is really going to cost you in interest. Some lenders quote you a promotion rate to get your business, but gloss over the fact that the “full indexed” rate is usually dramatically higher. We won’t let this happen to you.
GEMs—Growing equity mortgages. GEMs are really that, if you can afford them. GEMs raise your payments after a certain number of years, but the entire payment increase goes to reduce your mortgage. GEMs allow you to pay off a 30-year mortgage in about 18 years.
GOOD FAITH ESTIMATE—An estimate of closing costs given to you at the time of application.
HELOCs—Home equity lines of credit. These can make sense, if you’re careful with them. HELOCs allow most people to take advantage of tax laws to reduce their debt, or finance other worthwhile things with the equity in their homes. But HELOCs also put you at risk of losing your home, if you fall behind in payments.
JOINT TENANCY—When two or more people have equal ownership of property.
JUMBO LOAN—Used by zoos to increase their elephant stock. (Just kidding). “Jumbo” loans are mortgages of a dollar value greater than the amount Fannie Mae and Freddie Mac will buy.
LOCK-IN PERIOD—How long the lender will guarantee rates and terms. For instance, if a lender says their loan is a $100,000, 8% loan for 30 years, with a thirty-day lock-in, this lender will only guarantee those terms for a month.
LOAN ORIGINATION FEE, also called POINTS—Charged by the lender to help cover its costs and profit.
LTV RATIO—The relationship of the property’s market value to the total amount of the loan. Lenders just love it when you have a low LTV ratio.
MORTGAGEE TITLE POLICY—A policy you provide which indemnifies the lender if there are any undisclosed liens or other snags concerning the property you’re buying.
NEGATIVE AMORTIZATION—see DEFERRED INTEREST, but before you go there, DON’T go there! Stay away from negative amortization loans.
NON-CONFORMING LOAN—Were very popular during the hippie years. No, really, “non-conforming” loans are loans that do not meet the loan guidelines provided by Fannie Mae and Freddie Mac. Jumbo loans are non-conforming because they exceed the maximum loan amount set by Fannie and Freddie for loans they will buy.
PMI—Private mortgage insurance. You have to provide this when your loan has an LTV of 80 percent or higher. This insurance indemnifies the lender if you default and your property isn’t worth what’s owed on it.
POINTS, also called DISCOUNT POINTS—A “point” is simply one percent of any loan. Points sound so small, but can be so large. If you’re getting a $175,000 mortgage, for instance, a single “point” is $1,750. Lenders generally charge points if you want a lower interest rate. QUESTION: How do you know if you should pay the points, or pay a higher rate? Ask us!
PREPAYMENT PENALTIES—A rotten proposition! Mortgages with prepayment penalties actually charge you money if you want to pay off a loan early. Generally speaking, you’re crazy to get a loan with this provision, and it is illegal in many states.
PRE-QUALIFICATION—Many times, a worthless marketing ploy by lenders. Pre-qualifications aren’t binding—and some lenders deliberately pre-qualify you for a large and cheap loan when they know you probably won’t actually qualify for that loan when you apply for real. Forget pre-qualification! What you want is a PRE-APPROVED loan. Then you know to the penny what you can spend. A Tip: When you are pre-approved (as opposed to “pre-qualified”) you are also in a much better position to negotiate with a seller—it’s like you have cash in hand.
PRORATION—the amount of taxes and other fees you pay at closing versus what amount the other side pays. It’s a percentage of the total figures based on the time you will own the property in the year in which you purchase it.
RATIOS—Two ratios really interest lenders: (1) How does the amount of your potential mortgage payment compare to your gross monthly income? Lenders generally don’t want your payment over 28% of your income. (2) How does your total debt compare to your gross monthly income? Lenders generally don’t want your total debt to be over 36%
SETTLEMENT AGENT—The person in charge of actually closing the sale of a property.
SURVEY—A drawing that shows the boundaries of property. If there are easements, buildings or other improvements on the property, those areas also show on the survey.
TEASER RATES—These should usually be called sucker rates. Many mortgage companies promote a cheap rate for the first few months to entice you, but don’t exactly promote the whopping interest increase that follows. Don’t pick a mortgage based on the teaser rate! See “FULLY INDEXED RATE” before you go any further!
VA LOAN—A loan guaranteed by the Veteran’s Administration. VA loans are only made to veterans of the U.S. armed forces.
WARRANTY DEED—A document that guarantees the genuineness of a piece of property when it comes to legal description and history.
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