Tuesday, September 25, 2012

Home Loan Glossary

Home Loan Glossary

Even the most experienced borrower doesn’t always remember what all of the home loan terminology means. To help make the mortgage process easier, here are some common terms and their definitions.

Adjustable rate mortgage. This term is used to describe a mortgage where the interest rate changes during the loan term. For example, a 5/1 ARM means that the initial interest rate is in effect for five years. Thereafter, the interest rate is adjusted up or down annually based on an established index.

Appraisal. To determine that the house you want to purchase is worth what you are paying for it, the bank will ask a professional appraiser to evaluate it as part of the mortgage application process.

Closing. The final step before you become a home owner is the closing. This is when you sign the deed and the mortgage documents, pay any remaining expenses and finally get the keys to your new home.

Closing costs. Most of the fees and other expenses you pay to obtain a home mortgage are referred to as closing costs. This includes bank fees, points, legal fees and title insurance.

Commitment letter. Most banks will send you a commitment letter telling you they have approved your application for a mortgage.

Credit report. When evaluating your suitability to borrow, all lenders will check your credit by requesting a credit report from one or more of the three major credit reporting agencies, Equifax, Transunion and Experian.

Down payment. When you buy a home, you usually pay a portion of the purchase price from your own funds with a cash down payment and finance the remainder with a mortgage. Today, most banks prefer a minimum down payment of 20%. However, some will accept less.

Fixed-rate mortgage. A loan where the same interest rate applies for the entire term.

Gross income test. Most lenders require that principal, interest, property taxes and homeowner’s insurance not exceed 28% of your monthly gross income.

Jumbo mortgage. A loan that exceeds the conforming loan limits set by the Office of Federal Housing Enterprise Oversight. As of 2012, conforming loan amounts are $417,000, except in Alaska, Hawaii, Guam and the U.S. Virgin Islands, where the limit is $625,500. That limit also applies in certain high cost areas around the country.

Loan term. The number of years you have to repay the mortgage. While most mortgages were traditionally for 30 years, now loan terms of 10, 15, 20 and 25 years are available.

Mortgage interest rate. The interest rate the lender charges on the mortgage. Rates for 30 year loans are generally higher than those for 15 or 20 year loans.

Points. Many banks impose points as part of the fees they charge to lend money. One point is 1% of the mortgage. If you borrowed $100,000 with 1.5 points, you would have to pay $1,500.

Refinance. When interest rates drop, it is sometimes advantageous for a borrower to refinance his or her mortgage. Some borrowers also refinance from an adjustable rate loan to a fixed rate loan and when they want to withdraw additional cash.

Title insurance. This coverage insures you against any financial loss from defects in your title to real property. In the United States, virtually all banks require title insurance to protect their interest in a property.

Uniform Residential Loan Application (URLA). This form collects information about you and any co-borrower, about the house you want to purchase, they type of loan you want (term, fixed vs. variable, etc.) as well as details about your income, employment, assets and liabilities.

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