Glossary of mortgage terms

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Glossary of mortgage terms

By MARCIE GEFFNER

There's a lot of jargon involved in getting a mortgage. But all these vocabulary words don't have to be confusing, intimidating or overwhelming. This glossary explains mortgage terms you may encounter and what they mean.

Appraisal. A professional opinion of a property's fair market value, according to a licensed real estate appraiser. The appraiser's opinion is based on the property's location, characteristics and condition as well as recent sales prices of comparable properties.

Adjustable-rate mortgage (ARM). A mortgage that has an interest rate that can change at predetermined times over the lifetime of the loan. Most ARMs have caps that limit when and how much the rate can rise. See Hybrid loan.

Basis point. 1/100th of 1 percent - usually used to express differences in interest rates. In the mortgage industry, discount points and origination points are usually expressed as one full percentage point.

Break-even analysis. A calculation that shows when the cost of something equals its benefit. This type of analysis can be helpful to determine when the cost of discount points equals what you save with the lower rate. For example, if the points cost $3,600 and the rate cut resulted in a savings of $100 each month, the savings would equal the cost after 36 months, or three years. The three-year mark, in this example, is called the break-even point. See Discount points.

Closing. The conclusion of a real estate transaction. This is when the buyer receives the title to the property and the seller receives the cash or other consideration from the sale. Real estate brokers, lenders and settlement services providers are usually paid at closing. See Settlement services.

Closing costs. A variety of fees and expenses that buyers and sellers pay when they complete a real estate transaction. Examples include lender's fees, title search and title insurance costs, document recording fees, and settlement or attorney's fees. See Origination fee, Settlement services and Title insurance.

Closing Disclosure. A document given to home buyers and sellers at least three business days prior to closing. It itemizes how the settlement company or closing attorney will distribute the funds that the buyer and seller pay into the transaction. The Closing Disclosure is designed to be directly compared to the Loan Estimate so that borrowers can be sure they are getting the loan they were promised.

Conforming loan. A conventional loan that fits Fannie Mae's or Freddie Mac's guidelines for the characteristics of the borrower or property. If a loan is conforming, the lender can sell it to Fannie Mae or Freddie Mac. See Conventional loan and Non-conforming loan.

Contingency. A requirement that the buyer and seller agree to include in a real estate purchase contract. It must be fulfilled or waived for the transaction to close. One common contingency is the buyer's right to hire a home inspector. See Closing.

Conventional loan. Any loan that isn't guaranteed or insured by the government.

Discount point. An optional fee equal to one percent of the loan amount. A borrower might choose to pay this to get a lower rate. The opposite of a discount point is a lender rebate, which is when the borrower agrees to accept a higher rate in exchange for lower closing costs. A rebate is sometimes called negative points. See Basis point, Origination point, Point and Par rate.

Down payment. The portion of a home's purchase price that the buyer pays upfront in cash. May be expressed as a dollar amount or percentage. For example, a 10 percent down payment to buy a $250,000 home would be $25,000.

Escrow. When a borrower's earnest money deposit and documents are held in an account until the closing process is finished.

Escrow account. An account that the lender uses to hold and pay property-related expenses, such as homeowner's insurance, on the borrower's behalf. It is also called a lender's escrow or impound account. See Escrow.

FHA loan. A home loan insured by the Federal Housing Administration. FHA loans allow for down payments as low as 3.5 percent (though borrowers will still have to pay for mortgage insurance) and allow lower credit scores than most conventional loans. However, they tend to be more expensive than conventional loans. See Government loan.

Government loan. A home loan that's guaranteed or insured by a U.S. government agency. See FHA loan, VA loan and USDA loan.

Hybrid loan. A mortgage with a rate that's fixed for a set number of years, usually five, seven or 10, and then adjusts once or converts to a variable rate. See adjustable-rate mortgage (ARM).

Impound account. An account that the lender uses to collect and pay property-related expenses on the borrower's behalf. See Escrow account.

Jumbo loan. A loan for an amount that exceeds the loan limit for the county where the property is located. County loan limits are set annually by Fannie Mae and Freddie Mac.

Loan Estimate. A document that lenders give borrowers to show them the costs of getting a specific mortgage. The Loan Estimate is designed to be compared to the Closing Disclosure so that borrowers can verify that they got the loan they were promised. Some cost estimates can change before closing; others can't.

Mortgage insurance premium (MIP). The monthly cost paid by the borrower for FHA or USDA mortgage insurance. See FHA loan, Mortgage insurance and USDA loan.

Non-conforming loan. Any loan that doesn't fit Fannie Mae's or Freddie Mac's guidelines. See Conforming loan.

Origination fee. Any of a variety of fees that lenders charge borrowers when the borrower gets a loan from that lender. See Basis point, Discount point, Origination point and Point.

Origination point. An origination fee based on a percentage of the loan amount. See Basis point, Discount point, Origination fee and Point.

Par rate. A market interest rate given to borrowers who elect not to pay discount points to obtain a lower rate or receive a rebate to accept a higher rate. See Discount point and Point.

Principal, interest, taxes and insurance (PITI). Four amounts that comprise a typical monthly mortgage payment. The principal repays a portion of the original loan amount. The interest is a percentage of the loan amount that compensates the lender. Taxes are state and local government assessments based on a per-parcel amount or percentage of the property's tax-assessed value. Homeowner's insurance protects property owners and lenders from property losses due to fire, theft and other hazards. See Escrow and Impound account.

Private mortgage insurance (PMI). Insurance that borrowers pay to protect lenders if the borrower can't repay the loan. Borrowers are typically required to pay for this insurance when they get a loan with a down payment that's less than 20 percent. See Conventional loan.

Point. One percent of the loan amount. See Basis point, Discount point and Origination point.

Prequalification. A lender's preliminary determination of whether a borrower might qualify for a loan. A prequalification or "prequal" is usually based primarily on the borrower's credit score. A prequal is not a commitment from the lender to make that loan to that borrower. See Preapproval.

Preapproval. A lender's preliminary determination that a borrower could qualify for a specific type of loan and loan amount. A preapproval is usually based on the borrower's verified income and assets as well as a credit report. While a preapproval suggests the borrower is likely to qualify, it is not a loan commitment. See Prequalification.

Rate. The cost of borrowing money, expressed as a percentage. Some rates are fixed; others are variable. See Adjustable-rate mortgage and Hybrid loan.

Settlement services. A variety of services related to closing a real estate transaction. Examples may include title searches, title insurance, legal advice, document preparation, loan processing and loan origination. See Closing.

Title insurance. A type of insurance that protects lenders and property owners when someone else claims an ownership stake in the property or records a lien (a type of claim) against it. Title insurance is issued after a title company performs a search of public records and proprietary databases, looking for liens and claims of ownership.

USDA loan. A home loan insured by the U.S. Department of Agriculture. See Government loan and Mortgage insurance premium.

VA loan. A home loan guaranteed by the U.S. Department of Veterans Affairs. See Government loan.

About the Author: Marcie Geffner is a freelance journalist, writer, editor and book critic. She can be contacted through her website at www.marciegeffner.com.

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