20 Important Mortgage Terms To Know

20 Important Mortgage Terms To Know

20 Important Mortgage Terms To Know

Whether buying or selling a home it is important to know the terms that are being used when a mortgage is involved so you don’t end up under water. First and foremost the professionals you are working with should be telling you what these terms mean and what is the cost for you for the type of mortgage you choose. If you are not getting the answers you need then you are better off looking for someone else to assist you in the process.

While these terms are not overly complicated, knowing them before you start your home sale or home purchase will save you some time. The early legwork in getting a pre-approval to know what you can afford or seeing what your mortgage payoff is so you know if you can pay off the mortgage upon sale are important steps. Mortgages are long term commitments that can affect your lifestyle for some time to come. By fully understanding the terms of your mortgage and the amounts you will be paying you will be in a better position in the long run.

Adjustable Rate Mortgage (ARM)

A mortgage whose interest rate can adjust during the payback period based on market interest rates. ARM loans usually have limits on how much the interest rate can adjust per year and the maximum amount an interest rate can be adjusted to over the lifetime of the loan.

Amortization

Is the paying off a debt (principal plus interest) in fixed payments over a set period of time. Often times you will be presented with an Amortization Schedule when you take out a loan. The Amortization Schedule details what part of each payment goes towards principal and what part goes towards interest.

Construction Mortgage

Typically a short term loan where the borrower is given money to pay for the construction of a new home.   Payments are usually made on a schedule based on the percent the new construction home is built with final payment being given when the home can be occupied by the buyer. Construction loans must be refinanced into a traditional mortgage or sometimes automatically convert to a traditional mortgage.

Conventional Mortgage

A loan not backed by any government sponsor and instead insured by private companies. Due to higher risk with these loans, credit standards and down payment requirements are more strict than found with government sponsored loans. These loans must comply with guidelines set out by Fannie Mae. PMI will have to be paid where the down payments is less than 20%.

Escrow

An account setup by the lender to hold money for payment of home insurance and property taxes. Escrow accounts are generally required when you are putting down less than 20% towards the purchase of your home. If you are putting down more than 20%, an escrow account may be optional depending on lender requirements. Keep in mind the monthly payment for under your mortgage bill will be larger if you are also putting in money into an escrow account.  If after the sale of your home and paying off the mortgage and remaining money in the escrow account will be returned to the borrower.

Fannie Mae (FNMA)

Federal National Mortgage Association is a government sponsored entity whose main purpose is to help the secondary mortgage market. Fannie Mae’s main purpose is to provide liquidity to the mortgage market. Fannie Mae provides liquidity to the mortgage market by purchasing mortgages and mortgage backed securities sold to them from mortgage lenders.

FHA Mortgage

A government sponsored loan guaranteed by the Federal Housing Administration. Due to government backing, the lending standards for FHA loans are not as strict with down payments as low as 3.5% and lower credit rating requirements. Mortgage Insurance Premiums (MIP) are required to be paid if the home down payment is less than 20%.

Fixed Rate Mortgage

A mortgage whose interest rate will not change during the payback period.

Freddie Mac (FHLMC)

Federal Home Loan Mortgage Corporation is a government sponsored entity whose main purpose is to help the secondary mortgage market. Freddie Mac purchases mortgages on the secondary market and packages them up for resale to investors on the open market. This allows the mortgage market to be more liquid by freeing up money for additional lending.

Foreclosure

A situation that occurs when the borrower is unable to pay back the mortgage and as a result a legal proceeding is begun for the lender to obtain title and possession of the home upon which the mortgage is secured.  Upon sale of the house the court will return money foreclosurethat was owed to the mortgage to the lender and if there is any extra money collected from the sale that is above what was owed that amount is to be returned to the borrower.

Home Equity Loan

Home Equity Line of Credit (HELOC) or a Home Equity loan is money borrowed by offering up as collateral the equity in your home.  These loans are often used to fund home improvements, debt repayments, and more.

Jumbo Mortgage

A Jumbo Mortgage is a mortgage that exceeds limits imposed by Fannie Mae and Freddie Mac. The current Jumbo Mortgage limit is $417,000 in most parts of the U.S. and $625,500 in 100 high cost counties within the US. Since there is no government backing for these loans the requirements to obtain these loans are much higher in terms of down payment, credit rating and more.

LTV – Loan To Value

This is a number that represents the ratio of the total loan compared to the value of the home. LTV is used to determine when PMI should be paid or can stop being paid and is looked at by lenders when taking out a second mortgage on a home or when taking out a Home Equity Line of Credit (HELOC) on the home.

Mortgage Payoff Statement

A Mortgage Payoff Statement is a document from your lender that will tell you how much you need to pay off on your mortgage. Usually needed when selling your home, the mortgage payoff statement will include the remaining principal owed on the loan and any interest accrued up through the date of payoff.

P&I – Principal and Interest

P&I will be your normal monthly mortgage payment excluding escrow account payments if any.Picture of US Dollars

PMI -Private Mortgage Insurance

is mortgage insurance for conventional loans where less than 20% has been put down to purchase the home.

Reverse Mortgage

A Reverse Mortgage is a mortgage whereby the equity in a home is converted into cash for the benefit of the homeowner. Reserved for people 62 or older, the money can be used to supplement income needs during retirement. The amount owed on the mortgage remains with the house and will have to be paid off upon sale of the home.

Short-Sale

When a homeowner decides they must sell their home but know they will not be able to get enough money for the home through a market based sale to cover the loan. In order to proceed with a short sale the homeowner will request from their mortgage lender authorization to sell the home in a short sale.  If more than one mortgage has been taken out on the home or there is a home equity loan, additional approvals may be needed from the other lenders.  As part of the short sale the lenders are agreeing to accept less than the full amount (whatever the home will sell for on the open market) owed on the mortgage.

A short sale is usually a long and drawn out process that does not always result in a home selling. The homeowner is still required to pay mortgage payments while the home is on the market. Depending on the state you live in and the agreement you have with the lender you still may be liable for amounts that were not fully paid back. Consulting with an attorney or credit counselor is advisable when pursuing a short sale.

USDA Mortgage

U.S. Department of Agriculture backed mortgage. The USDA mortgage is limited to homes within certain rural areas and also has income limits. If your income is above the limit specified by the USDA you will not be able to qualify for this type of loan. See http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do for more information.

VA Mortgage

A government sponsored mortgage guaranteed by the Veterans Administration and only available to active US service members, veterans and their spouses. Requirements for these government backed mortgages are not as strict as Conventional Mortgage requirements in that no down payment is required and credit score requirements are not as strict.

Bottom Line

Understanding mortgage terminology helps you to better understand about the mortgage process and makes you a better educated consumer when it comes time to borrow money to purchase a home or to pay off your home loan upon sale.  By being familiar with the process and the terms involved you can make sure your needs are met and that you are getting the best deal possible for you.

Additional Resources

Insane but True Facts About the USDA Mortgage by Luke Skar
Top 10 Frequently Asked Questions About Mortgages by Kyle Hiscock
Financial Mistakes of First Time Home Buyers by Bill Gassett
Will My Home Purchase be Delayed with the New Mortgage Disclosure Laws? by Wendy Weir
21 Real Estate Terms Your Should Be Familiar With by Paul Sian

 

About the author: The above article “20 Important Mortgage Terms To Know” was provided by Paul Sian. Paul can be reached at paul.sian@herrealtors.com or by phone at 513-560-8002. With over 10+ years experience, if you’re thinking of selling or buying, I would love to share my marketing knowledge and expertise.

I service the following Greater Cincinnati, OH and Northern KY areas: Alexandria, Amberly, Amelia, Anderson Township, Cincinnati, Batavia, Blue Ash, Covington, Edgewood, Florence, Fort Mitchell, Fort Thomas, Hebron, Hyde Park, Indian Hill, Kenwood, Madeira, Mariemont, Milford, Montgomery, Mt. Washington, Newport, Newtown, Norwood, Taylor Mill, Terrace Park, Union Township, and Villa Hills.

Comments

comments

Comments

    • Paul Sian says

      Great question Tom.

      YSP or Yield Spread Premiums are referred to in my area as discount points. Some mortgage brokers do use them and some do not.

      Thanks!

      • says

        Paul,

        I think “YSP” is the bane of the mortgage industry. How many Mortgage Brokers have the courage to look at a prospective Borrower and say, “Oh, by the way, I am not only making points on this deal, I am also making the spread between what you could have received as an interest rate and what I jacked it up to in order to make some extra bucks”.

        Talk about conflict of interest.

        • Paul Sian says

          Tom,

          The mortgage people I work with I expect to be honest up front with anyone I refer to them. If not then they are no longer on my list and I won’t hesitate to let my clients know they may want to try again to get a good deal. That and educating borrowers is key.

          Thanks again for your comments.

Trackbacks

  1. […] ..Unless you’re a Realtor. Even complete laymen probably have an understanding of the most basic of real estate terms: equity, closing, and mortgage are all fairly common words. However, when you actually get elbow-deep into the world of home buying, words often pop up that you’ve probably never heard of before: amortization, escrow, principal/interest- not to mention the plethora of actual mortgage types out there. For a great guide, check out this post by Paul Sian at CinCinKy Real Estate: […]

  2. […] The amount of down payment required for financing an investment property depends on who the lender is and what type of property you will be purchasing. Some smaller lenders who hold the mortgage in their own portfolio rather than selling to a government sponsored enterprise (GSE) may be willing to lend with less money down than a lender who intends to sell the loan down the line. The GSEs like Fannie Mae and Freddie Mac will often buy loan packages from lenders in order to ensure that the mortgage lenders can continue to offer mortgages and not be frozen out of lending more due to lack of liquid cash. For more information on the GSEs and mortgages check out 20 Important Mortgage Terms To Learn About. […]

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