Mortgage Terminology - A Brief Glossary (Part 2)
Picking right back up where we left off in Part 1, we're diving in to the sometimes confusing world of mortgage and home loan terminology. Hopefully, this resource well set you up for success as you seek the home of your dreams, and will help you understand the ins and outs of the home loan process.
• Good Faith Estimate - A document that provides potential homebuyers information about a home loan, including estimated costs. • Gross Monthly Income - Total monthly income before taxes and other deductions. • Growing Equity Mortgage (GEM) - A type of mortgage where scheduled payments increase over time. These increases are applied directly to the remaining balance of the loan.
• High Ratio Loan - Mortgages that exceed an 80% loan-to-value ratio, calculated by the amount of the loan divided by either the sales price or appraised value (whichever is lower). • Home Inspection - A visual assessment by a professional, with an accompanying report of any potential problems. Inspections are sometimes required for a borrower to secure a home loan.
• Homeowners Insurance - Property insurance that covers losses or damage to a home and its contained assets. Proof of insurance is required to secure mortgage funds.
• Index - A published interest rate that lenders use to establish interest rates on mortgages and calculate the future of adjustable rate mortgages.
• Interest Rate Cap - The maximum interest rate increase per adjustment period for an adjustable rate mortgage.
• Joint Loan - A mortgage agreement with a co-borrower, who is equally responsible for the repayment of the loan. • Jumbo Loan - A loan that exceeds the limits established by Fannie Mae and Freddie Mac, and therefore cannot be funded by these corporations.
• Lender - The person or institution providing a mortgage loan.
• Lien - A claim on a property until a debt is paid or other conditions are met.
• Loan-to-Value Ratio (LTV) - The amount of the mortgage loan divided by the total value of the home, expressed as a percentage.
• Liquidity - The ability to turn assets, property, or investments into cash.
• Market Value - A probable price that a ready and willing buyer would pay for a property.
• Monthly Payment - The total amount paid each month, typically covering principal, interest, taxes, and insurance (PITI).
• Negative Amortization - A payment schedule that results in the outstanding balance going up, typically because payments do not cover interest accrued. • Non-Conforming Loan - A mortgage that is not eligible for sale to Fannie Mae or Freddie Mac.
• Origination Fee - Fees and costs associated with putting a mortgage in place, which may include application fees, appraisal fees, and other associated costs. • Prepayment - Making payments ahead of an amortization schedule, with payments applied directly the principal.
• Pre-Approval - A process that determines your eligibility for a home loan, as well as an estimate of the amount you will likely qualify for.
• Principal - The total loan balance excluding
• Property Tax - Taxes paid to the governing body of a property's area, determined by the area and type of property.
• Property Title - A document that proves ownership of property.
• Security - Property offered as collateral for a loan.
• Step Rate Mortgage - A mortgage with an increasing interest rate on a set schedule, that reaches a cap for the remaining duration of the loan.
• Truth-in-Lending Act - A federal law that requires full disclosure of credit terms and standard formatting.
While this is not a fully exhaustive list of every term you may encounter in your home hunting process, this should help you gain a better understanding of some of the more common terms. If you encounter confusing language, or someone you're working with is moving to quickly, never hesitate to ask as many questions as necessary. It's better to fully understand what you're signing up for, even if it causes some delays!