Understanding Mortgage Terms
Understanding mortgage terminology can be one of the most frustrating parts of purchasing a home. Not only are you nervous about making the right decision in which home will best suit the needs of you and your family, you also have the stress of committing to a long term loan. In addition, to all that you oftentimes feel as though you're functioning in a foreign land where everyone speaks a different language. Taking a few moments to understand mortgage terminology can go a long way in reducing your stress as you make your way through the mortgage maze.
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- Acceleration Clause — This is a clause used in a mortgage that can be enforced to make the entire amount of the loan and any interest due immediately. This is usually stipulated if you default on a specified number of installment payments (in some cases, just one payment.)
- ARM (Adjustable Rate Mortgage) — A loan in which the interest rate may fluctuate, increasing or decreasing, during the course of the loan.
- Alienation Clause — This is a clause in a mortgage that states the entire balance of the loan becomes immediately due if the property is sold.
- Amortization — This is the process by which the interest on a loan is payable in periodic installments over the course of the loan.
- Buy-down — This usually refers to a payment a borrower will make to a lender in exchange for lowering the interest rate on a mortgage loan.
- Equity — Refers to the value a homeowner builds into their property that is above and beyond the outstanding balance on the property.
- Escrow — This is a special account or transaction where funds (and sometimes documents) are placed. There are usually specific circumstances attached to the placement of funds and documents into escrow.
- Fixed Rate Mortgage — A type of loan where the interest rate remains the same throughout the course of the loan.
- Foreclosure — A legal process by which property that was used to secure a debt is sold in order to satisfy the debt. This occurs when there has been a default in payment on the debt.
- Fully Ammortized Loan — This is a loan in which both the principal and the interest are paid in specified installments. The loan is reduced to a zero balance at the end of the loan term.
- Lien — A legal claim against personal property. When a borrower has a mortgage on a home, the lender will hold a lien against the property in case of default. The mortgage itself acts as the lien.
- Mortgage banker — This is the person or firm who originates and services mortgage loans.
- Mortgage broker — A person who acts as an agent and brings borrowers and lenders together. A mortgage broker does not service loans.
- Mortgagee — The lender in a loan transaction.
- Mortgagor — A borrower in a loan transaction.
- Negative Amortization — Refers to a situation when the payment the borrower makes on the loan is not enough to cover both the interest owned and the balance. The outstanding interest is added back into the loan.
- Origination fee — This is the fee charged by a lender in order to cover the costs associated with taking the application on the loan, processing the loan and closing the loan. In most cases, the origination fee is a percentage of the amount of the loan.
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- PITI — This acronym refers to Principal, Interest, taxes and insurance.
- Point — Refers to a unit of measurement used for various loan charges. One point typically equals 1 percent of the loan amount.
- Prequalification — Refers to the process many borrowers choose where they consult a lender about the amount of money they are qualified to borrow before they actually select a home to purchase.
- Prepayment penalty — A financial penalty imposed when a borrower pays off the loan early. This fee is intended to reimburse the lender for any lost interest due to the loan being paid off early.
- Prime rate — This is the best interest rate normally given by banks to customers with excellent credit scores.
- Re-mortgage — Refers to the process by which a borrower pays off the first mortgage loan by obtaining financing from a second lender. This is usually done in order to obtain better interest rates, pay off a mortgage loan early or reduce monthly mortgage payments.
- Secondary mortgage market — Refers to the purchase and sale of existing mortgages. This market is intended to provider greater leverage for lenders and increased availability of funds for borrowers.
- Underwriting — Refers to the decision making process lenders use to review all the information on a borrower and a proposed property.