Mortgage Terms & Terminologies Explained
When dealing with anything this complicated, the list below isn’t comprehensive. If you have questions or would like additional clarification on any mortgage terms, please contact us.
Here’s a look at some of the most popular mortgage-related terms:
ARM's are loans where the interest rate is subject to change throughout the term of the loan. In many cases, the rate is fixed for a number of years and then can adjust thereafter with the market. Details on the terms of the ARM are located on the Loan Estimate. Many borrowers who are averse to risk and future payment increases opt for Fixed-Rate Mortgages.
This is also known as the term of your loan, and refers to how many payments you have to make. For fully-amortized loans, the loan balance will be paid to $0 over the term of the loan. So, if you have a 30-year fixed, fully-amortized loan, your mortgage balance will be paid in full in 360 months of equal payments.
Annual Percentage Rate (APR)
APR refers to the cost of the loan as a percentage of the amount financed. Unlike your interest rate (which is the amount of interest you’re actually paying on your debt and what you should negotiate), the APR is the total cost of loan expressed in the form of an annual rate on the remaining balance of the loan (outstanding balance). It’s complicated, for sure.
It is the fee that a lender charges in order to process a borrower’s loan application. At Red Oak Mortgage, we never charge any fees payable to us until closing.
In the case of a balloon loan, monthly payments 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 days, balloon loans are very rare.
These costs include all non-recurring charges relating to the closing of a mortgage. Closing costs generally include lender fees, title insurance-related fees, attorney fees, survey fees, credit reports, and other incidental expenses. Closing costs are estimated on your Loan Estimate.
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). This is a government sponsored entity (GSE) that creates uniformity among mortgage lenders to provide for marketable Mortgage Backed Securities on the secondary market. Most lenders nationwide underwrite their loans to these standards, and Red Oak Mortgage is no exception.
Federal Housing Administration (FHA)
FHA is a governmental agency that operates, oversees and monitors a wide variety of home-loan programs and initiatives. The FHA doesn’t lend money, but it does insure loans that meet the established criteria protecting lenders from potential losses.
Another GSE, like Fannie Mae, Freddie Mac establishes uniformity in underwriting with the intent of securities mortgages in bulk on the secondary market.
The index refers to the baseline for calculating future rate changes on Adjustable-Rate Mortgages. Some common examples are the 1-year LIBOR, or the 3-year Treasury. Indexes are publicly-reported financial metrics used by lenders.
Interest Rate Ceiling
Used with Adjustable-Rate Mortgages, the interest rate ceiling is the maximum rate that the mortgage can ever reach.
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). In this type of loan, the outstanding principal balance doesn’t change each month. This is the opposite of a fully-amortizing mortgage.
The fee imposed by the lender/servicer for failure to make timely payments. Generally, this is 4-5% of the mortgage payment.
Used in Adjustable-Rate Mortgages, the margin refers to the premium over the Index that the lender will charge when the interest rate adjusts.
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, for example in the event the house is sold or refinanced. The clause also applies in the instance 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).
This is the total monthly payment including taxes and insurance. It may also include Mortgage Insurance and HOA Fees, when applicable.
Private Mortgage Insurance (PMI)
PMI is the insurance provided to the lender (and paid for by the borrower) to protect against default. Generally, it is included on loans with less than 20% down.
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.
Rate Lock is the term used to define when the interest rate is confirmed for a particular mortgage transaction. All rate locks must be provided in writing and will include the rate the borrower is locked at and the expiration date of the lock.
Total Expense Ratio
This ratio is a percentage representing the monthly debt obligations to the gross monthly income.
For any further help with respect to mortgage terms or to find out the meaning and purpose of any other term, please contact us here.