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Shopping for a new
home is fun and exciting. Yet securing financing to buy real estate can
be stressful. The more you know about the home mortgage business,
however, the smoother your transaction will be. To help you get a handle
on financing terminology before you buy a home, we have defined some
commonly used mortgage terms.
Adjustable Rate Mortgage (ARM)
A mortgage in which the interest rate is adjusted periodically based on
an index. Also called a variable rate mortgage.
Amortization
The process of retiring debt or recovering a
capital investment through scheduled, systematic repayments of
principal. The life of a loan, e.g. a mortgage with a 25-year
amortization period means that if all regular payments were made in time
and the terms (payment, interest rate) remained the same then it would
take 25 years to reduce the balance to zero.
Assumable Loan
These loans may be passed on from a seller of a
home to the buyer. The buyer "assumes" all outstanding payments.
Broker
An individual in the business of assisting in
arranging funding or negotiating contracts for a client but who does not
loan the money himself. Brokers usually charge a fee or receive a
commission for their services.
Closing Costs
Fees paid by the borrower when property is
purchased or refinanced. These typically include a loan origination fee,
discount points, appraisal fee, title search, title insurance, survey,
taxes, deed recording fee, and credit report charges.
Conventional mortgage
An uninsured mortgage usually granted by a
financial institution. The loan is based on the value of real estate as
security and will not exceed 75% of total value.
Equity
A homeowner's financial interest in a property.
Equity is the difference between the fair market value of a property and
the amount still owed on the mortgage.
Fixed-Rate Mortgage
A mortgage where the interest rate does not change
for the life of the loan.
Guarantor
One who promises to pay a debt or perform an
obligation contracted by another in the event that the original obligor
fails to pay or to perform as contracted.
High Ratio Mortgage
A loan that exceeds conventional loan to value
limits (75%) and is therefore required by statute to be insured.
Loan-To-Value Ratio
The relationship between the amount of the mortgage
loan and the appraised value of the property expressed as a percentage.
A LTV ratio of 90 means that a borrower is borrowing 90% of the value of
the property and paying 10% as a down payment. For purchases, the value
of the property is assumed to be the purchase price, for refinances the
value is determined by an assessment. |
