Orange County Homes - Glossary
of Terms
Glossary of Terms
Adjustable Rate Mortgage (ARM)
A mortgage in which the interest rate is adjusted periodically based on
a pre-selected index, also referred to as the renegotiable rate mortgage.
Amortization
Means of loan payment by equal periodic payments calculated to payoff
the debt at the end of a fixed period, including accrued interest on the
outstanding balance.
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Annual Percentage Rate (APR)
The interest rate that reflects the cost of a mortgage as a yearly rate. This
rate is likely to be higher than the stated note rate or advertised rate on
the mortgage, because it takes into account points and other credit costs. The
APR allows home buyers to compare different types of mortgages based on the
annual cost for each loan, however all lenders do not calculate APR the same
way.
Broker
This person assists in arranging funding or negotiating contracts for
a client, but does not loan the money himself. Brokers usually charge a fee
or receive a commission for their services.
Buydown
This is when the lender and/or home builder subsidizes the mortgage by lowering
the interest rate during the first few years of the loan. While the payments
are initially low,
they increase when the subsidy expires.
Construction Loan
This is a short-term interim loan for financing the cost of construction. The
lender advances funds to the builder at periodic intervals as the work progresses.
Discount Points
Prepaid interest assessed at closing by the lender. Each point is equal to one
percent of the loan amount, i.e., two points on a $100,000 mortgage would cost
$2,000.
Earnest Money
Money given by a buyer to a seller as part of the purchase price to bind a transaction
or assure payment.
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, they are generous
enough to handle moderately priced homes almost anywhere in the country.
FHA Mortgage Insurance
Requires a small fee (up to 3% of the loan amount) paid at closing or a portion
of the fee added to each monthly payment of an FHA loan to insure the loan with
FHA. On a 9.5% $75,000 fixed-rate FHA loan, this fee would amount to either
$2,250 at closing, or an extra $31 per month for the life of the loan. In addition,
FHA mortgage insurance requires an annual fee of 0.5% of the current loan amount
in the years the fee must be paid.
Impound/Escrow
That portion of a borrower's monthly payments held by the lender or servicer
to pay for taxes, hazard insurance, mortgage insurance, lease payments, and
other items as they become due. Also known as reserves.
Index
A published interest rate against which lenders measure the difference between
the current interest rate on an adjustable rate mortgage and that earned by
other investments (such as one-year, three-year, and five-year US Treasury Security
yields, the monthly average interest rate on loans closed by savings and loan
institutions, and the monthly average Costs-of-Funds incurred by savings and
loans) which is then used to adjust the interest rate on an adjustable mortgage
up or down.
Margin
The amount a lender adds to the index on an adjustable rate mortgage to establish
the adjusted interest rate.
Mortgage Insurance
Money paid to insure the mortgage when the down payment is less than 20%. See
Private Mortgage Insurance or FHA Mortgage Insurance.
Negative Amortization
Negative amortization occurs when the monthly payments are not large enough
to pay all of the unpaid balance of the loan, therefore increasing the loan
balance and going in a "negative" direction. In this particular scenario,
a borrower can literally end up owing more money than they originally borrowed.
The reason that this occurs is because on a negatively amortized loan, the borrower
is given several different payment options.
. OPTION 1: To pay what is known as the fully indexed payment. This is the margin
plus index on the adjustable. This payment, which is typically the highest of
the options, will prevent you from going negative.
. OPTION 2: An interest only payment. You would not be going negative by making
this payment either, but you would not be decreasing the principal balance that
you owe on your loan. This is because you are paying only the interest portion
and no additional principal to your loan.
. OPTION 3: (And the one that most often gets people into trouble...) The negatively
amortized payment. This is a payment that not only does not cover the principal,
but doesn't cover all of the interest owed on the monthly payment, therefore
accruing negative equity as a result.
Origination Fee
The fee charged by a lender to prepare loan documents, make credit checks, inspect
and sometimes appraise a property; usually computed as a percentage of face
value of the loan.
PITI
Also known as monthly housing expense, this is the principal, interest, taxes
and insurance.
Piggy Back Loan
"Piggy Back Loan" is a slang term, which really is another way of
describing a 1st and 2nd Trust Deed that close concurrently at the close of
escrow. This combination of a 1st and 2nd Trust Deed can be effectively utilized
to avoid the need to pay private mortgage insurance. The borrower may apply
for a loan at 90% with the same 10% down payment. A 1st Trust Deed at 80% and
a 2nd Trust Deed at 10% could be procured concurrently. The interest rate on
the 2nd Trust Deed is typically higher, often a double-digit figure.
However, the fact that the interest can be deducted on the 2nd Trust Deed often
makes this a prudent financial option for the borrower. The net result is often
cheaper than borrowing 90% of the financing as one loan and incurring a private
mortgage insurance payment. See Private Mortgage Insurance.
Pre-payment Penalty
Money charged for an early repayment of debt. Pre-payment penalties are allowed
in some form (but not necessarily imposed) in most states in the US, as well
as the District of Columbia.
Private Mortgage Insurance (PMI)
In the event that you do not have a 20% down payment, the lender will allow
a smaller down payment, sometimes as low as 3%. However, with a smaller down
payment, borrowers are usually required to carry private mortgage insurance
on the loan. Private mortgage insurance will require an initial premium payment
of 1% to 5% of your mortgage amount and may require an additional monthly fee,
depending on your loan structure. On a $75,000 home with a 10% down payment,
this would mean either an initial premium payment of $2,025 to $3,375, or an
initial premium of $675 to $1,130 combined with a monthly payment of $25 to
$30.
Title Insurance
A policy usually issued by a title insurance company, which insures a home buyer
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.
Underwriting
Provides (or declines) funding to potential home buyers, based upon factors
such as credit, employment, assets, etc., and matches approved risks with appropriate
rates, terms and loan amounts.
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