While there is no need for you to be a mortgage expert, having a basic understanding of certain key concepts will help you better understand the mortgage process and get you closer to your goal of homeownership. Knowing some of the terminology associated with mortgages, especially some of the buzzwords you hear in the news, is a great start.
Here is a brief overview of terms that will help guide you in choosing the best mortgage options for you.
Annual Percentage Rate (APR): The APR includes the base interest rate, points and other loan fees.
Closing Costs: Appraisal fee, credit report fee, attorney’s fee, origination fees and discount points, which are fees paid at closing, make up closing costs.
Discount Points: A point is 1% of the home loan. Borrowers can pay points at closing as a way to buy down the overall interest rate.
Fannie Mae, Federal National Mortgage Association (FNMA), and Freddie Mac, Federal Home Loan Mortgage Corporation (FHLM): Fannie Mae and Freddie Mac are responsible for setting annual conforming loan limits, and helping a wider range of people become homeowners by agreeing to purchase loans on the secondary market. Fannie and Freddie loans are called conforming loans. While the government subsidizes Fannie and Freddie, which are also known as government-sponsored enterprises (GSEs), they are actually owned by private stockholders.
Foreclosure: When a borrower has defaulted or ceased paying on their mortgage, the lender can take possession of the home. Foreclosure laws vary from state to state.
Good Faith Estimate (GFE): This is a federally regulated estimate of all the fees associated with a loan’s closing costs, including pre-paids, escrow items and lender charges.
Loan-To-Value (LTV) Ratio: A mortgage lender divides the amount of the loan by the appraised value of the home to come up with a percentage. A high LTV, such as 90%, means the borrower only has to contribute a small down payment (in this case 10%). A lower LTV, such as 80%, requires more cash to put down, but may negate the need for private mortgage insurance.
Mortgage Insurance: This protects the lender in the event of a default. When buyers take out a mortgage down payment of less than 20%, they must pay mortgage insurance, a monthly premium that is added to the mortgage. This protects the lender should a buyer default on the home loan.
Principal, Interest, Taxes and Insurance (PITI): These are four elements that make up a monthly mortgage payment. Payments of principal and interest go toward repaying the loan, while the payment for taxes and insurance goes into an escrow account to cover those costs when they are due.
Pre-Paids: Some costs, such as taxes, insurance, and interest are paid before the first monthly mortgage payment is due. They are collected on the HUD at closing but are separate from “closing cost.”
Qualifying Ratios: A formula is used to determine the loan amount borrowers may qualify for based on the ratios of income to expenses, partially determined by the percentage of the borrower’s income that goes to pay bills.
Rate Lock: When a lender locks in a rate, it constitutes a guarantee that the interest rate will not change for a set period of time while the loan is finalized. Rate locks will expire if closing takes longer than anticipated, but they can be extended, generally for an additional fee.
Real Estate-Owned Property (REO): REOs are lender-owned properties that failed to sell as a foreclosure or short sale.
Second Mortgage: A borrower may take out a second, piggyback mortgage in order to avoid mortgage insurance. A home equity loan is also a second mortgage. Because second loans are more risky for the lender, they usually carry a higher interest rate.
Short Sale: When a borrower can’t sell their home for enough to cover the existing mortgage balance, thus avoiding a foreclosure. When this happens, a lender may agree to accept a lower payoff than the current balanced owed on the mortgage. Short sales involve a lot of paperwork and generally damage the homeowner’s credit.
Underwriting: An underwriter analyzes all the documents related to a loan and all the information the borrower has provided to determine if the loan is a good risk.
If you have questions about these or any other mortgage terms you’re coming across, just give Integrated Funding a call. Our Raleigh, NC mortgage advisors would happy to help you learn more about the mortgage industry. Contact us today for assistance at (919) 847-2766.