When you are a homebuyer, you can sometimes feel that the real estate professionals you deal with are speaking a different language. There is a great deal of terminology that it behooves you to learn as you delve into the closing process. Before you visit a lending institution, it is important to brush up on your banking lingo. Applying for a mortgage is easier when you understand what your lender is saying to you. Here are some common terms you should familiarize yourself with before sitting down with a bank or mortgage provider.
Amortization: Refers to the paying off of debt over time. It may also take into consideration the depreciation in value of an asset over time.
ARM: Acronym for adjustable rate mortgage, which is a mortgage whose interest rate is either raised or lowered at regular intervals. Sometimes called a variable-rate mortgage.
Assumed Mortgage: When a buyer of a real property assumes the mortgage terms and obligations of the seller of the real property. Usually used when the buyer will not receive an interest rate as low as the rate on the seller's mortgage.
Collateral: Any asset that is promised if one cannot satisfy a loan agreement.
Down payment: The initial upfront payment portion for a loan. Some loans require down payments, while others do not. By requiring a down payment, a lender increases its chances of recovering the full amount if the borrower defaults on payments.
Encumbrance: Anything that limits a property's title such as leases, easements, liens, deed restrictions, or building orders.
Equity: The difference between market price of a property and any remaining liability, such as the amount still owed on a loan.
FHA: Stands for Federal Housing Administration, which is a government entity to improve housing standards and conditions, and to stabilize the market. The FHA also provides financing. Applicants must meet criteria concerning employment history, credit scores and income.
Foreclosure: Refers to the legal process during which a lender repossesses a piece of real property after a borrower defaults in repayment. The lender can then re-sell the property.
HUD: Stands for the Department of Housing and Urban Development, which is a government agency that enables low-income families to secure housing.
Principal: An agreed upon sum to be paid over a fixed period of time, to be repaid by a certain date.
Interest Rate: The percentage of the principal that is paid back to the lender as a fee (interest), over a certain period of time.
PMI: Private Mortgage Insurance. When a borrower's down payment is less than 20% of the sale price, the borrower must obtain private mortgage insurance through the lender which protects the lender from loan default.
Underwriting: The process that a financial service provider uses to assess the eligibility of a customer to receive products like insurance, mortgage, or credit.
80-10-10: This is a program involving two loans with a 10% down payment. The 90% loan is financed through a primary mortgage that is 80% of the sale price, and a second mortgage covers the remaining 10% of the sale price. While the secondary loan carries a higher interest rate, it is only for a small portion of the total loan. Therefore, monthly payments of the two mortgages are less than if paying one mortgage and PMI.
Your choice of mortgage is one of the most important financial decisions that you will make in your lifetime. Different mortgages can have dramatically different outcomes and long-term impacts on your financial health that cannot be determined by looking at payment or rate alone. The right mortgage could literally create or cost you tens of thousands of dollars over its lifetime. Be sure to do your homework, and talk to different lenders before you make your final decision.
At Setco Services, we take a great deal of pride in walking our clients through the entire title and closing process. We offer first class service to buyers, sellers, and real estate professionals and our customers tend to be surprised at how smoothly the process runs when they partner with us. If you have any questions about acquiring a mortgage or any of the steps in the closing process, please contact one of our local offices today and let us show you why we’re the #1 title company in the Florida Panhandle.