Home Buying Terminology

Here are some important mortgage terms to familiarize yourself as you go through your new home buying process.

ALTERNATIVE FINANCING—
Includes mortgages at a lower-than-market rate-adjustable rate, graduated payment and buy down mortgages, as well as hybrid mortgages.

AMORTIZATION—
Almost all of the payment in the early years of an amortized loan is applied toward interest. Contrarily, almost all of the payment in the last years of the loan is applied to reduce the principal.

ASSUMABLE LOAN—
Described as a loan (for example, FHA/VA loans) that can be assumed by a subsequent buyer for a minimal assumption fee. This type of loan, which does not include conventional loans), saves thousands of dollars in closing costs and loan origination fees.

CLOSING COSTS & PREPAIDS—
Paid in addition to the down payment on closing day, closing costs can include attorney's fees, loan origination fees, appraisal fees document preparation, escrow fee, and survey and recording fees. Other costs are tax escrow, hazard insurance, flood insurance (if the down payment is less than 20 percent), and, on occasion, the entire first year's private mortgage insurance premium. Usually, the appraisal and credit report fees are paid at application.

DISCLOSURE—
Encompassing all the parameters of a mortgage loan, this document includes, but is not limited to, the terms, conditions, and interest rate caps.

DOWN PAYMENT—
The customary minimum down payment, described as the difference between the mortgage and the lower of the purchase price or appraisal, is three percent on most loans. For a down payment of less than 20 percent, private mortgage insurance is required.

EARNEST MONEY—
To show that the buyer is serious about purchasing a house, earnest money, or deposit money, is given to the seller by the buyer. The earnest money is then applied to the down payment if the loan goes through; if it doesn't, the earnest money could be forfeited.

EQUITY—
The amount of money calculated to be the difference between a home's fair market value and the loan amount, and/or encumbrances (e.g., liens or claims) against it.

INDEX—
A way to measure and adjust the interest rate, such as the commonly used index, the Treasury bill.

LOCK-IN—
Usually anywhere from 30 to 270 days, a lock-in is the timeframe that a lender can guarantee interest rate and points agreed on by both the lender and the purchaser.

MARKET RATE—
The average rate, estimated, charged by lenders for conventional or FHA/VA loans.

NEGATIVE AMORTIZATION—
Most times, this is the principal balance of the loan that accrues during the years of a variable rate or graduated payment mortgage when the payments are smaller than market rate. This principal balance of the loan grows because of payments that are not adequate to cover all the interest due.

ORIGINATION FEE—
The fee, included in the closing costs, that the lender charges for establishing the loan.

POINTS/DISCOUNT POINTS—
Calculated as one percent of the loan amount, points or discount points are charged by the lender to issue a loan at below-market rates. Buyers and sellers, or buyers and lenders, can negotiate points. Those points charged as prepaid interest may be tax deductible for the buyer, depending on his or her tax bracket.

PREPAYMENT PENALTIES—
A penalty in the form of fees due from the borrow who pays off his loan balance before it is due.

(PRE) QUALIFYING—
As a buyer, you must qualify for a loan. The rule of thumb is that the monthly payment can't be more than 25-28 percent of the buyer's gross monthly income. And, all of the buyer's monthly debt cannot total more than 33-36 percent of his or her monthly income. Factors also taken into consideration, though, are the buyer's prior credit history, down payment, and job history.

PRIVATE MORTGAGE INSURANCE (PMI)—
The insurance lenders require from the borrower on conventional financing. PMI protects the lender against loan default when a down payment of less than 20 percent is made.

TITLE—
Documented proof that the buyer has a clear ownership of the property. Until the title company has guaranteed the lender that no hidden problems exist with a title instrument to a piece of property, a loan usually doesn't close.

TITLE INSURANCE—
Paid for by the borrower, a title insurance policy is required by the lender-and ensures clear title against future claims to the lender. (To protect their equity, borrowers can also purchase title insurance.)
It's a good idea to learn as much as you can about mortgages in order to make sound financing choices. Remember, an informed home buyer is a smart home buyer!

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