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Frequently
Asked Mortgage Questions and Mortgage Terms
MORTGAGE
TERMS:
ADJUSTABLE RATE MORTGAGE: Variable or flexible rate mortgage
with an interest rate that adjusts periodically according to the financial
index it is based upon plus a margin. This type of mortgage typically provides
a lower rate than a FIXED RATE MORTGAGE offered at the same point in time.
To limit the borrower’s risk, the ARM may have a payment or rate cap.
ANNUAL PERCENTAGE RATE (APR): The cost of credit expressed
as a yearly rate, taking into account interest, points, and other finance
charges. Disclosure of the APR is required by the Federal Truth-in-Lending
Act and allows borrowers to compare the costs of different mortgage loans.
APPRAISAL: An estimate of property’s value as of
a given date, determined by a qualified professional appraiser. The value
may be based on replacement cost, the sales of comparable properties or
the property’s ability to produce income.
BALLOON MORTGAGE: A mortgage that has level monthly payments
that are insufficient to amortize the loan so that a balloon, or lump sum
payment, is due at the end of the term. Frequently, balloon mortgages contain
an opportunity to refinance when the balloon payment is due.
BASIS POINTS: Used to describe mortgage yield, one basis
point equals one 100th of 1% or 0.01%. A mortgage yield increase from 9.50%
to 9.75% is an increase of 25 basis points.
CAP: A limit on how much an adjustable rate mortgage’s
monthly payment or annual interest rate can increase. A cap is meant to
protect the borrower from large increases. They include a payment cap (a
limit on the monthly payment increase), an interest cap (a limit on how
much the interest may go up), a life of loan cap (a limit of the maximum
interest rate that can be charged), or periodic cap (a limit on the amount
that the interest can change each time it is adjusted)
CLOSED END MORTGAGE: A mortgage principal amount that is
fixed and cannot be increased during the life of the loan.
CLOSING COSTS: Costs payable by either seller or buyer
at the time of settlement when the purchase of a property is finalized,
or by borrower when a loan is refinanced. They include expenses such as
points, taxes, title insurance, mortgage insurance, and attorneys’
fees. You will receive more specific information about types and amounts
of closing costs applicable to your transaction from the state where your
property is located when you apply for a loan.
COLLATERAL: Something of value pledged as security for
a loan. In mortgage lending, the property itself serves as collateral for
a mortgage loan.
COMMITMENT FEE: A fee charged when an agreement is reached
between a lender and a borrower for a loan on specific terms and conditions.
Rate and points may be locked in or may be floating.
CONVENTIONAL LOAN: A mortgage loan that is not insured,
guaranteed or funded by the Veterans Administration, the Federal Housing
Administration or Rural Economic Community Development.
CONVERTIBLE MORTGAGE: An adjustable rate mortgage that
allows a borrower to switch to a fixed rate mortgage during a specified
period.
DOWN PAYMENT: The difference between the purchase price
and mortgage amount. The down payment becomes your property equity. Typically
it should be cash savings, but it can also be a gift that is not to be repaid
or a borrowed amount secured by assets.
ESCROW FUNDS: Money held by the lender for payment of the
taxes and insurance on your home.
FIXED RATE MORTGAGE: This type of mortgage sets a permanent
interest rate that will not change during the life of the mortgage. The
benefit is that your interest rate is protected even if rates go up dramatically.
The rate quoted at a given time will generally be a little higher than an
ADJUSTABLE RATE MORTGAGE quoted at the same time.
GIFT FUNDS: Funds donated to the borrower from certain
eligible sources to assist the borrower in meeting closing costs. Generally
eligible sources are a relative, church, municipality, or nonprofit organization.
HOMEOWNERS INSURANCE: A form of insurance that protects
the insured property against loss from theft, liability and most common
disasters. Also referred to as hazard insurance.
INTEREST RATE: The simple interest rate, stated as a percentage,
charged by a lender on the principal amount of borrowed money.
LOCK IN: The guarantee of a specific interest rate and
or points for a specific period of time. Some lenders will charge a fee
for locking in an interest rate.
MORTGAGE INSURANCE: Insurance that protects a mortgage
lender against loss in the event of default by the borrower. This insurance
allows lenders to make loans with lower down payments. The borrower is responsible
for the cost. This is only required when the down payment is less than 20%.
POINTS: Charges levied by the lender based on the loan
amount. Each point is one percent of the loan amount.
PREQUALIFICATION: Tentative establishment of a borrower’s
qualification for a mortgage loan of a specific amount or ability to make
monthly payments at a certain level based solely on debt to income ratios.
Prequalification is only an estimate and is subject to debt and income verification,
credit history, property appraisal and other factors.
QUALIFICATION: As determined by a lender the ability of
the borrower to repay a mortgage loan based on the borrower’s credit
history, employment history, assets, debts, income and other factors.
QUESTIONS
AND ANSWERS
Is 20% a required down payment?
There is no set amount that a purchaser must put down. First time homebuyer
programs require as little as 3%. A mortgage loan can be tailored to fit
each individual’s financial abilities. However, this is the minimum
amount necessary to avoid paying private mortgage insurance.
Is there a minimum income level to qualify for a mortgage?
There is no set minimum income requirement for qualification. However, just
as average home costs differ by geographic area so does average income levels
needed to support the monthly mortgage payment. A mortgage representative
is able to tell you what you will qualify for based on your income level.
Will late payments or defaults disqualify me for obtaining that
mortgage?
Almost everyone at one time or another has forgotten to pay a bill on time
or has had trouble making a payment. If you are able to demonstrate that
the problem is in the past and you have reestablished a good track record
for a sufficient amount of time, you may be in a position to get a mortgage.
Lenders don’t just look at your past history. They also look at your
ability and willingness to pay in the future. |
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