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For most of us, a home mortgage is the most significant financial transaction we will ever undertake. It is perfectly human to feel a little intimidated by the thick documents usually associated with these transactions. It doesn't make it any easier when these documents are filled with legal, financial and real estate jargon.
While you should always seek competent professional advice from a real estate practitioner or attorney, the definitions that follow may be a helpful guide to the sometimes confusing terms related to your mortgage.
A lender's right to demand immediate repayment of the balance of a loan may be contained in an "acceleration" or "due-on-sale" clause. This right is usually contingent on specific events such as payment delinquency or the sale of the property. While virtually all mortgages have an acceleration clause, the details may vary and should be scrutinized for fairness and workability.
Adjustable Rate Mortgage (ARM)
A home loan with interest and payment amounts that may fluctuate periodically based on an index such as the cost of funds or Treasury bills. While adjustable rate mortgages may have lower rates initially, the allowable margin increases may cause the effective interest rate to increase disproportionately to the index itself over time. Prospective borrowers should pay special attention to the cumulative effect of the increases allowed under the terms of the loan agreement.
To amortize simply means to make installment payments. Therefore amortization of a mortgage means the application of equal periodic payments to satisfy a debt.
An agreement where the buyer takes over the payments on an existing mortgage from the seller. When interest rates are historically high, assumption can be an attractive option for both buyer and seller. In most instances, the lender's approval is required and some processing fees may be required.
A balloon mortgage is designed to leave a portion of the loan unpaid at the end of the term. Normally, a large installment, called a balloon payment, will be due. A balloon payment may make sense for purchasers who plan to sell the property before the loan term expires.
The mortgagor is a borrower who applies for and receives a loan using real property as security.
A payment made at the outset of a loan for the purpose of reducing the interest rate. The buy-down payment is usually made by a seller or builder seeking to make a deal more attractive.
The end-stage of a real estate transaction where a final accounting and disbursement of funds and exchange of documents occurs. Transfer of ownership is culminated. Closing is sometimes called settlement. Your real estate professional should have the experience to help you achieve a smooth closing and be prepared to respond to any unplanned barriers to settlement.
A loan that is not insured or guaranteed by the federal government. (As opposed to a government-backed loan such as one insured by the FHA or guaranteed by the VA.)
A deposit of funds made by the buyer to the seller, usually at the outset of an agreement, to demonstrate serious intent and good faith to buy the home. An earnest money deposit may be either refundable or non-refundable, depending on the terms of the agreement.
Equity is the residual value derived by subtracting the value of any mortgage and liens secured against a property from its appraised value. For example, a property valued at $180,000 with $40,000 due on the mortgage and a $5,000 lien would have an equity of $135,000.
Third-party custody of deeds, funds or other property that will be delivered to a grantee after terms of a purchase agreement have been mutually fulfilled. Escrow companies help to provide an added measure of fairness and security in real estate transactions. Not to be confused with an impound account which is sometimes called an escrow account.
A home loan where the interest rate remains constant for the entire term of the loan. Fixed-rate mortgages have the advantage of financial predictability, however, they normally have a higher initial interest rate.
Foreclosure bars the right of the mortgagor to redeem equity. In foreclosure proceedings the home is sold by the lender to satisfy the debt.
Graduated Payment Mortgage (GPM)
A home loan in which the installments increase over time according to an agreed upon schedule. Graduate payments may make sense for persons who are confident of upward mobility.
Impound Account or Escrow Account
An account established by the lender to hold funds from a monthly payment that will be applied to payment of property taxes or insurance premiums on the property.
A published rate such as the interest rate on Treasury bills or the average cost of funds. This rate is used in the calculation of adjustable rate mortgages.
In an adjustable rate mortgage, the margin is the number of percentage points added to the specified index rate in order to determine the interest rate. You should look closely at your loan agreement for details of the margin rate.
PITI is an acronym for Principal, Interest, Taxes and Insurance. The total of these expenses on a monthly basis are known as the monthly housing expense and are included in the mortgage payment in many loans.
Points are interest payments made at the origination of a loan. One point is equal to one percent of the mortgage principal.
The amount borrowed, or the amount still owing on a loan.
The Truth-In-Lending Act is a federal law designed to protect mortgage consumers from unscrupulous or difficult to read agreements. Under the law, the terms of the mortgage, including the annual percentage rate of interest, must be clearly disclosed.
Understanding basic terminology about your home mortgage can increase your confidence as you approach your next move. For more information online, you may wish to check the mortgage terms listed at the Mortgage Bankers Association of America website at http://www.mbaa.org or the Fannie Mae consumer information website at http://www.fanniemae.com.
"Real Service in Real Estate." For a personal consultation on buying or selling real estate, Janis Peterson, GRI, ABR, CSP Realtor® can be reached at (610) 642-3744, e-mail: email@example.com. Prudential Fox & Roach Realtors® is an independently owned and operated member of The Prudential Real Estate Affiliates, Inc.
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