Mortgage Terms & Terminologies Explained
A mortgage is a type of loan that is secured against the value of your primary home or any other real estate you retain ownership of. Mortgages are offered at both fixed interest rates (which remain unchanged throughout the loan term) or at adjustable rate (which vary over the passage of time). Typically, the repayment period ranges from 15 to 30 years, depending upon the type of loan availed. Here’s a look at some of the most popular mortgage-related terms:
It refers to the process by which the principal and interest on a mortgage loan are paid throughout the term of the loan, in the form of scheduled and periodic installments. The repayment details are decided at the time of signing the loan document.
Annual Percentage Rate (APR)
APR refers to the cost of the loan as a percentage of the outstanding amount. This means that the total cost of loan is expressed in the form of a yearly rate on the remaining balance of the loan (outstanding balance).
It is the fee that a lender charges in order to process a borrower’s loan application. Such cost is borne by the borrower.
In the case of a balloon loan, monthly installments (or repayment of loan) are not sufficiently large enough to repay the entire loan at the end of the loan term. The balance remaining at the end of the loan-term is to be paid out as a lump sum amount.
These costs include all incidental charges relating to the sale of the real estate. In normal cases, closing costs include the loan arrangement, title transfer and appraisal fee. In certain other types of loans, closing costs may include additional charges.
Convertible Adjustable-Rate Mortgage
Convertible mortgages are fixed-rate loans. However, they offer the borrower the flexibility to convert them into adjustable-rate loans at a specified time during the loan term.
Equal Credit Opportunity Act
An anti-discrimination federal law that prohibits lenders and all other creditors from refusing to grant credit to an applicant on the basis of the applicant’s race, national origin, gender, age or marital status.
Fannie Mae is a popularly used acronym for the Federal National Mortgage Association (FNMA).
Federal Housing Administration (FHA)
FHA is a governmental agency that operates, oversees and monitors a wide variety of home-loan programs and initiatives. FHA loans carry low-interest rates and minimum down payments.
This acronym refers to an expense ratio, devised by the Federal Home Loan Mortgage Corporation Housing. It is calculated as the percentage of the gross monthly income expensed out as housing costs.
These financial tables are often used by lenders in calculating the interest rates for adjustable mortgages, as well as those on Treasury bills.
Interest Rate Ceiling
Fixated by regulatory authorities, the interest rate ceilings provide the highest interest rate that a lender can charge for any adjustable-rate mortgage offered. It represents the maximum income cap and profit margins for lenders.
A type of mortgage that requires the borrower to repay only the interest that accrues on the loan balance at each payment period (usually a month). This means the outstanding balance does not decline with each payment.
Whenever the borrower fails to make a payment on time, a late charge (or penalty) is imposed.
Mortgage Acceleration Clause
A clause in the mortgage agreement that enables the lender to demand the entire balance of the loan to be repaid as a lump sum payment, in the event the house is sold or refinanced. The clause also applies in the instant that the borrower defaults or where the title changes hands.
This refers to a fee charged for processing any loan agreement. It is also known as Points PITI (Principal, Interest, Taxes and Insurance). The figure represents a borrower’s actual monthly mortgage-related expenses.
Private Mortgage Insurance (PMI)
PMI is a special type of loan that is awarded to a borrower if the down payment is less than 20% of the home value (purchase price of the home).
These formulas are used by the lenders to estimate how much a potential buyer can borrow. In other words, qualifying ratios denote the affordability range of the buyer for the lender’s purposes.
It is an option given to the buyer to select and set an interest rate during the loan application stage. Rate lock allows borrowers to set an interest rate that is well within their affordability range.
Total Expense Ratio
This ratio is a percentage representing the monthly debt repayments and obligations to the gross monthly income.
This denotes an index used in determining the interest rate changes and movements in interest for all adjustable rate mortgages.
For any further help with respect to mortgage terms or to find out the meaning and purpose of any other term, please contact our mortgage loan officers today