This week we are going to define mortgage terms that you will hear during the process of your loan. The definitions will be generic and simple to ensure understanding.
Note: This is the IOU that you sign where you promise to pay back the money you borrowed from the bank. The note outlines the terms of how you are to pay back the loan (term, interest rate, payment, and principal amount).
Mortgage: This the lien that a bank places against your home. Think of it as collateral for the bank.
Term: This is the lenght of time that your note is amortized over. The most common term is 30 years. Basically, this is how long it will take to payoff the note.
Interest Rate: This is the percentage rate that a bank charges for you to borrow the money.
Principal Amount: This is the amount that you borrow.
Amortization: This is a schedule of payments showing the break down of each payment toward principal and interest over the term.
Principal: This is the amount of each payment that goes towards reducing the principal amount.
Interest: This is the amount of each payment that goes towards the interst due to the bank.
Escrows: This is an account that is funded by monthly payments to ensure the ability to pay taxes and insurance.
MI (Mortgage Insurance): This is insurance for the bank for loans over 80% loan-to-value. It is designed to protect the bank in case of default.
Loan-to-Value: This is a ratio calculated by taking the loan amount and dividing it by the value of the home.
Debt-to-Income: This is a ratio calculated by taking the total monthly debt obligations of the borrower and dividing it by the total monthly net income.
Appraisal: A report preformed to determine the value of a home.
Underwriting: The process of reviewing a file for approval by a bank.
Title: A document showing the ownership of the property, the liens on the property, and the legal description of the property. Issued by a title company to ensure a lender a clean property.
Fixed Rate: A note where the interest rate is fixed for the term of the note.
Adjustable Rate: A note where the interest rate is fixed for a portion of the term of the note. Once the fixed term expires, the interest rate will change.
Annual Percentage Rate (APR): This is not the interest rate. This is the true cost of your note (closing costs, interest paid, and principal amount repaid) expressed in terms of a percentage rate. The closer this rate is to the interest rate, the lower the cost to you.
Good Faith Estimate (GFE): This is an estimate of the closing costs that you will be charged for your mortgage. A properly completed GFE should include lender fees, title fees, government fees, third party fees, and the mortgage broker fee. Also, recently required on the GFE is Yield Spread Premium.
Truth-In-Lending: This is a form that shows the APR and how it is calculated. It also includes your monthly payments over the term of the loan.
Should you ever hear something pertaining to your mortgage that you are not familiar with, please ask for clarification.
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[...] best way to protect yourself is to ask for a copy of the Good Faith Estimate and Truth-In-Lending. These items are required to be given to you within 3 days of signing an application. Also, ask [...]