Helpful Finance Terms

One of the more stressful elements of buying a home, particularly your very first home, seems to be the financing process. Felson Homes, Inc. wants you to be more informed by understanding the Financing Lanquage that you will be exposed to by your lenders, so below lists the more commonly used financing terms.

• adjustable-rate mortgage (ARM)
  A mortgage in which the interest rate (and therefore the monthly payment) can fluctuate up (or down) during the life of the loan. Depending on the specific loan terms, your interest rate may change every six or 12 months. Because the initial interest rate is often lower for an adjustable-rate loan, the monthly payments during the first few years may be lower than a fixed-rate loan. Some homebuyers prefer the adjustable-rate mortgage if they do not expect to stay in the home for more than a few years, or if they think interest rates are heading down.
  
  
• amortization
  A way that you will you repay your mortgage gradually through regular equal monthly payments of principal and interest. The amounts of these payments are calculated to let you own your home debt-free at the end of a fixed period of time. During the first few years of your loan, most of the payment will be applied to interest. During the final years, most of the payment will be applied to principal. This type of repayment method is called amortization.
  
  
• APR (annual percentage rate)
  The total cost of the mortgage, expressed as a percentage of the loan amount. Unlike the base interest rate (which only includes interest), the APR includes all costs associated with your loan, including points, origination fees, PMI, etc. Because different lenders charge different fees, the APR is a good way to compare the total cost of a loan from various lenders.
  
  
• appraisal
  An estimate of the value of property, made by a qualified professional called an "appraiser." This value is determined by comparing your property to others which have sold recently in your area.
  
  
• assessment
  A local tax levied against a property for a specific purpose, such as the addition of a sewer or street lights.
  
  
• borrower (mortgagor)
  One who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full.
  
  
• broker
  An individual in the business of assisting in arranging funding or negotiating contracts for a client, but who does not lend money himself. Brokers usually charge a fee or receive a commission for their services.
  
  
• buy-down
  A mortgage subsidy that is sometimes offered by a homebuilder to help buyers afford the property. The builder pays a portion of the interest payment for a few months (or sometimes a few years), thereby lowering the initial monthly payment for the buyer.
  
  
• caps (interest)
  Consumer safeguards which limit the amount the interest rate on an adjustable rate mortgage which may change per year and/or the life of the loan.
  
  
• caps (payment)
  Consumer safeguards which limit the amount that monthly payments on an adjustable-rate mortgage may change.
  
  
• closing
  The meeting between the buyer, seller and lender or their agents where the property and funds legally change hands. Also called settlement. Closing costs usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed-recording fee, credit report charge and other costs assessed at settlement. Closing costs are usually about 3 to 6 percent of the mortgage amount.
  
  
• closing costs
  All upfront fees and charges related to the home purchase, excluding the down payment. Closing costs may include points or other origination fees, any prepaid interest, prorated property taxes (if any), etc. For most loans, the closing costs are paid by the buyer at the close of escrow.
  
  
• COFI
  Adjustable-rate mortgage with rate that adjusts based on a cost-of-funds index, often the 11th District Cost of Funds.
  
  
• conventional loan
  A mortgage not insured by FHA or guaranteed by the VA.
  
  
• credit report
  A report from an independent credit-rating service (such as TRW or Equifax) listing a person's current obligations to various creditors, including credit card companies, car payments, student loans, etc. The report shows how much is owed, as well as whether payments are generally made on time. A credit report is a required document when applying for a home loan.
  
  
• debt-to-income ratio
  The ratio, expressed as a percentage, which results when a borrower's monthly-payment obligation on long-term debts is divided by their gross monthly income. See housing expenses-to-income ratio.
  
  
• default
  Failure to meet legal obligations in a contract; specifically, failure to make the monthly payments on a mortgage.
  
  
• delinquency
  Failure to make payments on time. This can lead to foreclosure.
  
  
• down payment
  The portion of the purchase price which a buyer pays before moving in. Often, the down payment is expressed as a percentage of the total purchase price, typically between 3 and 20. If you have never owned a home before, your down payment often comes from personal savings, an employer-sponsored 401K program, or other source. If you are selling one home in order to buy another, then your down payment usually comes from the equity in your current home. In addition to the down payment, there are usually other costs and fees called closing costs which a buyer needs to pay before moving in. See closing costs.
  
  
• earnest money
  Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.
  
  
• Equal Credit Opportunity Act (ECOA)
  A federal law that requires lenders and other creditors to make credit available without discrimination based on race, color, religion, national origin, age, sex, marital status or receipt of income from public assistance programs.
  
  
• equity
  The difference between the fair market value and current debt owed on the property.
  
  
• escrow
  An account held by a mortgage company into which the homebuyer pays money for their tax or insurance payments.
  
  
• Fannie Mae
  See Federal National Mortgage Association
  
  
• Federal Home Loan Mortgage Corporation (FHLMC) also called "Freddie Mac"
  Is a quasi-governmental agency that purchases conventional mortgage from insured depository institutions and HUD-approved mortgage bankers.
  
  
• Federal Housing Administration (FHA)
  A division of the Department of Housing and Urban Development. Its main activity is the insuring of residential mortgage loans made by private lenders. FHA also sets standards for underwriting mortgages.
  
  
• Federal National Mortgage Association (FNMA) also called "Fannie Mae"
  A tax-paying corporation created by Congress that purchases and sells conventional residential mortgages as well as those insured by FHA or guaranteed by VA. This institution, which provides funds for one in seven mortgages, makes mortgage money more available and more affordable.
  
  
• FHA loan
  A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans which vary by region, they are generous enough to handle moderately-priced homes in most areas.
  
  
• FHA mortgage insurance
  Requires a fee, which is usually financed and is currently 1.5% of the loan amount for a 30-year loan, to be paid at closing to insure the loan with FHA. In addition, FHA mortgage insurance requires an annual fee of up to 0.5 percent of the current loan amount, paid in monthly installments. The lower the down payment, the more years the fee must be paid.
  
  
• FHLMC
  The Federal Home Loan Mortgage Corporation provides a secondary market for savings and loans by purchasing their conventional loans. Also known as "Freddie Mac."
  
  
• fixed-rate mortgage
  A mortgage in which the interest rate (and therefore the monthly payment) remains the same for the entire life of the loan. 30-year and 15-year fixed-rate mortgages are industry standards. Many homebuyers prefer a fixed-rate loan because the payment amount never changes.
  
  
• FNMA
  The Federal National Mortgage Association is a secondary mortgage institution which is the largest single holder of home mortgages in the United States. FNMA buys VA, FHA, and conventional mortgages from primary lenders. Also known as "Fannie Mae."
  
  
• foreclosure
  A legal process by which the lender forces a sale of a mortgaged property because the borrower has not met the terms of the mortgage. Also known as a repossession of property.
  
  
• Freddie Mac
  see Federal Home Loan Mortgage Corporation
  
  
• Ginnie Mae
  see Government National Mortgage Association
  
  
• good-faith estimate
  A line item estimate from a lender of total closing costs.
  
  
• Government National Mortgage Association (GNMA)
  Also known as "Ginnie Mae," provides sources of funds for residential mortgages, insured or guaranteed by FHA or VA.
  
  
• guaranty
  A promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform according to a contract.
  
  
• hazard insurance
  A form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm and the like.
  
  
• homeowner's insurance
  Insurance including hazard coverage that insures for damages that may affect the value of a house, in addition to personal liability and theft coverage.
  
  
• housing expenses-to-income ratio
  The ratio, expressed as a percentage, which results when a borrower's housing expenses are divided by his/her gross monthly income. See debt-to-income ratio.
  
  
• index
  A published interest rate which is used to adjust the interest rate on an adjustable mortgage up or down.
  
  
• indexed rate (also known as fully indexed rate)
  The sum of the published index plus the margin. For example if the index were 5% and the margin 2.75%, the indexed rate would be 7.75%. Often, lenders charge less than the indexed rate the first year of an adjustable-rate mortgage.
  
  
• interest
  The amount that is added onto your loan (in dollars) to cover the cost of borrowing money to finance your home. The "interest payment" is the portion of your monthly payment that is applied against the interest owed. At the beginning of your loan period, the majority of your monthly payment is applied against the interest. But over time, more and more of the payment is used to reduce the amount of principal owed.
  
  
• interest rate
  The cost of borrowing, expressed as an annual percentage of the principal. Many factors influence the interest rate you will be charged, including the overall state of the economy, the cost the lender is charged to borrow the funds, etc.
  
  
• investor
  A money source for a lender.
  
  
• lien
  A claim upon a piece of property for the payment or satisfaction of a debt or obligation.
  
  
• loan-to-value ratio
  The ratio of the amount of money owed on a home to the home's value. The difference between these two figures initially is the down payment.
  
  
• lock
  Lender's guarantee that the mortgage rate quoted will be good for a specific number of days from day of application.
  
  
• margin
  The amount (usually fixed) that a lender adds to the index (which varies) on an adjustable-rate mortgage to establish the adjusted interest rate.
  
  
• market value
  The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time.
  
  
• MIP (Mortgage Insurance Premium)
  A type of insurance from FHA which protects a lender against incurring a loss on an account because of a borrower's default.
  
  
• mortgage analysis
  A calculation of how much home you can afford, based on your income, your current credit obligations, etc.
  
  
• mortgage insurance
  Money paid to insure the mortgage when the down payment is less than 20 percent. See private mortgage insurance, FHA mortgage insurance.
  
  
• mortgagee
  The mortgage company (the lender).
  
  
• mortgagor
  The borrower or homeowner.
  
  
• net effective income
  The borrower's gross income minus federal income tax.
  
  
• One-year adjustable-rate mortgage
  Mortgage whose annual rate changes yearly. The rate is usually based on movements of a published index plus a specified margin.



• origination fee
  The fee charged by a lender computed as a percentage of the face value of the loan.
  
  
• PITI
  The total amount of your monthly payment. Principal and interest (P&I) are due on every loan. Taxes and insurance (T&I) are also included if the lender requires an impound account.
  
  
• points (loan discount points)
  An upfront fee charged by a lender to process a mortgage. Each point represents 1% of the loan amount. So a $120,000 loan with one point means a fee of $1,200. For most (but not all) loans, the points must be paid at the close of escrow, and cannot be added to the amount of the loan.
  
  
• power of attorney
  A legal document authorizing one person to act on behalf of another.
  
  
• prepaid expenses
  Necessary to create an escrow account or to adjust the seller's existing escrow account. Can include taxes, hazard insurance, private mortgage insurance and special assessments.
  
  
• prepayment
  A clause in a mortgage that permits the borrower to make payments in advance of the due date, which are applied directly to the principal balance of the loan.
  
  
• prepayment penalty
  A fee charged for an early repayment of debt. Prepayment penalties are limited in many states.
  
  
• prequalification
  Another name for a mortgage analysis.
  
  
• principal
  The amount of your loan (in dollars), excluding interest. The "principal payment" is the portion of your monthly payment that is applied against the principal. In the first several years of your loan, only a small amount of the payment is applied to the principal. As time goes on, more and more of the payment is used to reduce the amount of principal owed.
  
  
• private mortgage insurance (PMI)
  Insurance purchased by the lender to protect them in case a buyer cannot make their loan payments. PMI typically costs from $50?$200 per month, depending on the size of the mortgage. This monthly amount is paid by the homebuyer as part of their monthly mortgage payment. Buyers can avoid a PMI payment if their down payment is large enough (typically 20% of the home price).
  
  
• REALTOR?
  A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors.
  
  
• recording fees
  Money paid to a lender, title company or escrow agent for recording a home sale with the local authorities, thereby making it part of the public records.
  
  
• refinance
  Obtaining a new mortgage loan on a property already owned. Often to replace existing loans on the property.
  
  
• RESPA
  Short for the Real Estate Settlement Procedures Act. RESPA is a federal law that allows consumers to review information on settlement costs and regulates certain activities of lenders, title companies, Realtors, and escrow agents.
  
  
• satisfaction of mortgage
  The document issued by the mortgagee when the mortgage loan is paid in full. Also called a "release of mortgage."
  
  
• servicing
  All the steps and operations a lender performs to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, property inspections, etc
  
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• settlement/settlement costs
  See closing/closing costs
  
  
• simple interest
  Interest which is computed only on the principal balance.
  
  
• survey
  A measurement of land prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any buildings.
  
  
• title
  A document that gives evidence of an individual's ownership of property.
  
  
• title company
  Firm that ensures that the title, or actual legal document of ownership, on a property is clear and provides title insurance.
  
  
• title insurance
  A policy, usually issued by a title insurance company, which insures a homebuyer against errors in the title search. The cost of the policy is usually a function of the value of the property, and is often borne by the purchaser and/or seller.
  
  
• title search
  An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company.
  
  
• truth-in-lending
  A federal law requiring disclosure of the annual percentage rate (APR) to homebuyers shortly after they apply for the loan. Also known as Regulation Z.
  
  
• underwriting
  The decision whether to make a loan to a potential homebuyer based on credit, employment, assets and other factors and the matching of this risk to an appropriate rate and term or loan amount.
  
  
• variable-rate mortgage (VRM)
  Another name for an adjustable-rate mortgage (ARM)
  
  
• verification of deposit (VOD)
  A document verifying the status and balance of the borrower's financial accounts, signed by their financial institution.
  
  
• verification of employment (VOE)
  A document verifying the borrower's position and salary, signed by their employer.
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