Types of Mortgages | Carolyn Carpenter-Hawkins

First time home buyers St Louis MO Carolyn Carpenter St Peters Mo Real Estate Types Of Mortgage

Adjustable Rate Mortgage (ARM): A mortgage loan with payments usually lower than a fixed rate initially, but is subject to changes in interest rates. There are a variety of ARMs that can have an initial interest rate that lasts three to 10 years, adjusting annually thereafter. They are described as 3/1, 5/1, 7/1 and 10/1. A 3/1 ARM starts out with a low rate that lasts three years, then is adjusted annually. A 5/1 ARM has an introductory rate that lasts five years, and 7/1 and 10/1 ARMs have intro rates that last seven and 10 years. The monthly payment amount is usually subject to a cap.

Amortization: Repayment of a mortgage loan through regular monthly installments of principal and interest. At the end of the scheduled payments (e.g., monthly payments for 15 or 30 years), you will own your home.

Annual Percentage Rate (APR): Calculated by using a standard formula, the APR is expressed as a yearly rate (e.g., 8.107% APR) and includes the interest, points (discount and origination), mortgage insurance, and other fees. The APR on a mortgage will usually be higher than the stated interest rate because the APR includes fees and the interest rate doesn’t.

Assets: Assets are anything of financial value that can be converted into cash (i.e., stocks and bonds, automobiles, real estate, retirement funds, and savings).

Assumable mortgage: A mortgage that can be transferred from a seller to a buyer. The buyer then takes over payment of an existing loan.

Automated Underwriting System: A computerized system used to assess information provided by a borrower, plus public information about the borrower, to quickly determine whether a loan should be pre- approved.

Balloon mortgage: A mortgage that typically offers low rates for the first 3 to 10 years, at which point the principal balance needs to be paid in full. Borrowers usually sell before the balance is due or refinance the loan.

Bankruptcy: Bankruptcy is the legal process in which a person declares their inability to pay off their debts. Bankruptcy does not mean you cannot get a loan, but the terms of your loan may not be as favorable.

Borrower: A person who has been approved to receive a loan and is then obligated to repay it and any additional fees according to the loan terms.

Bridge loan: A loan that “bridges” the gap between the purchase of a new home and the sale of the borrower’s current home. Usually up to 6 months long.

Cap: A limit, such as that placed on an adjustable rate mortgage, on how much a monthly payment or interest rate can increase or decrease.

Collateral: In real estate, property offered to secure [or offered as security for] repayment of a loan, though not with the intention of transferring property ownership.

Credit report: A detailed history of an individual’s credit worthiness. This is used by lenders to gauge a potential borrower’s ability to repay a loan.

Default: The inability to pay monthly mortgage payments in a timely manner or to otherwise meet the mortgage terms.

Delinquency: A borrower’s failure to make mortgage payments when they are due.

Discount point: Discount points are paid to a lender (usually at closing) to reduce the interest rate on a loan. Each point is equal to 1% of the total loan amount. (Also see: Points)

Equity: Calculated by subtracting the amount still owed on the mortgage loan and any liens from the fair market value of the property. Equity grows as the mortgage is paid down and the property appreciates in value.

Fannie Mae: A private, shareholder-owned company that purchases residential mortgages and converts them into securities for sale to investors. Fannie Mae supplies funds that lenders may loan to potential homebuyers. Its original name was Federal National Mortgage Association (FNMA), started by the federal government in 1938.

The Fed: The Federal Reserve System, a network of twelve Federal Reserve Banks and affiliated branches that serves as the central bank of the United States. “The Fed” also often refers to the Board of Governors of the Federal Reserve System. The Fed Board sets overnight lending rates for banks. This is what banks charge each other for borrowing money overnight, which they do when they need to replenish their reserves. The Fed uses these rates to control inflation: if it lowers these rates, more money flows in the form of loans to consumers and businesses; if it raises rates, there are fewer loans. Mortgage rates are not tied to the Fed’s rates, but they are influenced by it.

Federal Housing Administration (FHA): The FHA was established in 1934 to advance home ownership opportunities for all Americans. It provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories.

FICO: An acronym for the Fair Isaac Corporation, the company that developed the most commonly used credit scoring system. Credit reporting agencies issue FICO scores to lenders who in turn use them to calculate the risk on a loan.

Fixed-rate mortgage: A mortgage with payments that remain the same throughout the life of the loan because the interest rate and other terms do not change.

Foreclosure: The legal process by which a bank or lender sells or repossesses a mortgaged property because the borrower could not pay the loan.

Freddie Mac: Created in 1970 by the federal government as the Federal Home Loan Mortgage Corporation, it is a stockholder-owned corporation chartered by Congress to increase the supply of funds that mortgage lenders, such as commercial banks, mortgage bankers, savings institutions and credit unions, can make available to home buyers and multifamily investors.

Fully amortized loan: If the payment schedule on a loan is met, the loan principal will be entirely paid off at the end of the term.

Ginnie Mae: A government-owned corporation overseen by the U.S. Department of Housing and Urban Development, Ginnie Mae pools FHA-insured and VA-guaranteed loans to back securities for private investment. Like Fannie Mae and Freddie Mac, the investment income provides funding that may then be lent to eligible borrowers by lenders. Ginnie Mae stands for Government National Mortgage Association (GNMA).

Good faith estimate (GFE): A written estimate of all expected closing fees including pre-paid and escrow items as well as lender charges. It must be given to the borrower, by a potential lender, within three days after submission of a mortgage loan application. By law, brokers and lenders are required to make as accurate an estimate as possible.

Homeowner’s insurance: Provides damage protection for your home and personal property from a variety of events, including fire, lightning, burglary, vandalism, storms, explosions, and more. All homeowner’s insurance policies contain personal liability coverage, which protects against lawsuits involving injuries that occur on and off your property. It is required by most lenders.

HUD: The U.S. Department of Housing and Urban Development. Established in 1965, HUD works to create a decent home and suitable living environment for all Americans by addressing housing needs, improving and developing American communities, and enforcing fair laws.

HUD-1 Statement: Also known as the “settlement sheet,” it is an itemized listing of closing costs. The closing costs can include a commission, loan fees and points, and sums set aside for escrow payments, taxes and insurance. It is signed by both the buyer and the seller, who may share closing costs.

Index: A measurement used by lenders to determine changes to the interest rate charged on an adjustable rate mortgage. Interest: A rate or fee charged for the use of borrowed money.

Interest rate: Usually expressed as a percentage, it is the amount of interest charged that determines a monthly loan payment.

Lender: An institution, such as a bank or broker, which loans money to be repaid with interest.

Loan: Money borrowed that is usually repaid with interest.

Loan application: The first step in the official loan approval process; this form is used to record important information about the potential borrower necessary to the underwriting process.

Loan-To-Value ratio (LTV): The loan amount divided by either the lesser of the sales price of a property, or its appraised value. The LTV ratio is used during the loan approval period to gauge risk: the higher the LTV ratio, the higher the interest rate, and vice versa.

Lock-in: A guarantee of an interest rate if a loan is closed within a specific time.

Margin: Expressed in percentage points, the amount a lender adds to an index to determine the interest rate on an adjustable rate mortgage.

Mortgage: A lien against real estate given by a buyer or property owner to the lender as security for money borrowed. Essentially, it is a legal agreement that means if the borrower stops making payments, the lender can take possession of the house.

Mortgage banker: One who originates, sells, and services mortgage loans and resells them to secondary mortgage lenders such as Fannie Mae or Freddie Mac.

Mortgage broker: A firm that originates and processes loans for a number of lenders.

Mortgage insurance: A policy protecting lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan; mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home’s purchase price. Also known as PMI (Private Mortgage Insurance).

Mortgage Insurance Premium (MIP): Also known as Private Mortgage Insurance (PMI), a monthly payment by a borrower for mortgage insurance. This protects the lender by paying the costs of foreclosing on a house if the borrower stops paying the loan. Mortgage insurance usually is required if the down payment is less than 20 percent of the sale price.

Negative amortization: When the payment on a loan is less than the interest that accrues on the principal. The balance of interest owed is added to the total loan.

Origination: The process of preparing, submitting, and evaluating a loan application; generally includes a credit check, verification of employment, and a property appraisal.

Origination fee: The fee a lender charges for processing a loan. This includes the cost to prepare loan documents, check a borrower’s credit history, and inspect the property.

Par rate: A rate of interest on a loan for which the lender does not charge (nor pay) points. An interest rate lower than the par rate would cost the broker money; an interest rate higher than the par rate would pay the broker a commission. [The par rate can vary, depending on the qualifications of a particular borrower.]

Points: A point equals 1 percent of a mortgage. Lenders sometimes charge “origination points” to cover expenses of making a loan. Also, borrowers sometimes pay “discount points” to reduce the loan’s interest rate.

Pre-Approval: A commitment in writing from a lender that a borrower would qualify for a particular loan amount based on income and credit information.

Pre-Payment Penalty: A pre-payment penalty means that if you pay off your mortgage loan earlier than agreed, you will pay a penalty. However, if you agree to pay a pre-payment penalty, you will usually get a better interest rate.

Pre-qualify: When a lender informally evaluates a borrower’s finances to determine how much he or she can afford to borrow and on what terms.

Prime Rate: The published interest rate at which banks make short-term unsecured loans to their best customers. The rate generally is the same across all major banks, and adjusts at the same time.

Principal: The original amount of a debt; a sum of money agreed to by the borrower and the lender to be repaid on a schedule. Interest is calculated as a percentage of principal.

Principal, Interest, Taxes, and Insurance (PITI): The four elements that make up a monthly mortgage payment. The principal and interest payments go towards repaying the loan, while taxes and insurance (homeowner’s and mortgage, if applicable) goes into an escrow account to cover the fees when they are due.

Principal: The amount of money borrowed from a lender, not including interest or additional fees.

Refinancing: The act of paying off one loan by obtaining another. Refinancing is generally done to secure better loan terms, such as a lower interest rate.

RESPA: The Real Estate Settlement Procedures Act is a 1974 law aimed at protecting consumers by requiring disclosures (including a Good Faith Estimate) and forbidding kickbacks for referrals among the service providers involved in the sale of a home. For example, a real estate agent may not receive a payment for referring the client to a particular title insurance company.

Seller’s market: When the demand for homes in a given marketplace exceeds the supply of properties on the market.

Title insurance: Insurance protecting the lender (or a homeowner) against any claims that could arise from arguments about ownership of the property. Should a problem arise, the title insurer pays any legal damages.

Truth-in-Lending: A federal law obligating a lender to give full written disclosure of all fees, terms, and conditions associated with the loan’s initial period and any adjustments to the remaining term of the loan.

Underwriting: The process of analyzing a loan application to determine the amount of risk involved in making the loan. It includes a review of the potential borrower’s credit history and a judgment of the property value.

Yield Spread Premium: A percentage of the loan amount, the YSP is what a lender pays a broker for a loan with a higher interest rate, and lower fees.

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