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There are a lot of unfamiliar terms that get tossed around during the mortgage process. But don't worry, we've put together this glossary to help you get a better grasp of any terms that may be less than clear.
Unlike APRs for credit cards that only reflect compounding interest, a mortgage APR also takes into account points, origination fees, mortgage insurance, and other closing costs. When comparing loans with the same rate from various lenders, pay close attention to the APR. A higher APR is an indication that you may have to pay a significant amount towards closing costs.
An adjustable rate mortgage, commonly referred to as an ARM, is a loan type that allows the lender to adjust the interest rate during the term of the loan. Generally, these changes are determined by a margin and an index so that the interest rate changes, up or down, are based on market conditions at the time of the change. Most often, these interest rate changes are limited by a rate change cap and a lifetime cap.
Closing costs are the fees for services, taxes or special interest charges that surround the purchase of a home. They include up front loan points, title insurance, escrow or closing day charges, document fees, prepaid interest and property taxes. When comparing loans make sure you get all the facts about closing costs before you choose a lender.
A conforming loan is defined by the maximum amount you may borrow. The maximum amount varies depending on the number of individual residential units in the property:
Any loan amount above the conforming maximum amount is considered a jumbo-conforming loan.
The loan limits are set by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).
The Economic Stimulus Act of 2008 establishes temporary increases to investor conventional loan limits for the first lien mortgage loans in high-cost areas, as defined by the U.S. Department of Housing and Urban Development (HUD).
A ratio used by lenders to calculate the loan amount requested as a percentage of the value of a home. To determine the loan to value ratio, divide the loan amount by the home's value. The LTV ratio is used to determine what loan types the borrower qualifies for as well as the cost and fees associated with obtaining the loan.
MI, or Mortgage Insurance, insures the lender against possible default. It is required when the borrower is making a cash down payment of less than 20 percent of the purchase price.
In most cases, MI can be removed after the loan-to-value ratio drops below 80 percent. The Homeowners Protection Act requires MI to be dropped when the loan-to-value ratio reaches 78 percent of the home's original value AND that the loan closed after July 29, 1999.
With points, you pay more for the loan in exchange for lower monthly payments in the future. Points are up front mortgage fees on a loan and are used as a way to reduce the interest rate of a loan. Each point is equivalent to 1% of the loan amount. For example, if you are borrowing $100,000, 1 point is equal to a $1,000 up front fee, 2 points to a $2,000 up front fee and so on.
Points are a good solution if you are planning to stay in your home for a long period of time. Think of points as pre-paid interest. If you pay points, you should stay in your house long enough so that the savings from the lower payments exceed the amount you paid in points.
Points may also have tax advantages. When you purchase a home, points usually are deductible for the year you purchase your home. Please consult your tax advisor for more details.
The interest rate is a fee charged by a lender for the use of borrowed money. Rates are expressed as a percentage you pay against the borrowed sum within a year.
An index used to establish an interest rate of some adjustable rate mortgages (ARM).