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Adjustable-Rate Mortgage (ARM) A mortgage with an interest rate that can change periodically. In some cases, an ARM is the best scenario, but it is not always the case.
If you agree to an ARM, your rate could raise or lower over the course of your mortgage. This may not be your best choice while rates are low.
Annual Percentage Rate (APR)
The annual cost of a loan to a borrower. Like an interest rate, the APR is expressed as a percentage. Unlike an interest rate, however, it includes other charges or fees (such as mortgage insurance, most closing costs, and loan origination fees) to reflect the total cost of the loan.
While APR can be confusing, it is really helpful in comparing loans because it accounts for all costs.
An opinion of a property’s fair market value, based on an appraiser’s knowledge, experience, and analysis of the property. Appraisal is based primarily on comparable sales.
During the mortgage process, the home you are looking to buy will be appraised by a neutral third-party professional. This appraisal will determine if you are borrowing too much or too little based on what the house is worth.
Closing Disclosure (CD)
A document which provides key information such as interest rate, monthly payments, and costs to close the loan. It lists all costs associated with getting the loan so you get the whole picture before signing.
You will receive a closing disclosure a few days before closing. Make sure you read it! This document will sum up everything you are about to close on, so you’ll want to double check that it is what you expected. The closing is when you sign all of the loan papers and give the sellers the money, then you become legally responsible for the mortgage.
A specified condition in a sales contract that must be satisfied before the home sale can occur. When buying a home, the 2 most common contingencies are that the house must pass inspection and that the borrower must be approved for a loan.
If you do not go the preapproval route, you may experience another common contingency: if the buyer cannot get a mortgage loan within a specific time, he or she can cancel the deal and get the deposit back.
The amount of cash you pay toward the purchase of your home to make up the difference between the purchase price and your mortgage loan.
Typically, the larger the down payment, the less you borrow and the lower the monthly repayments.
A deposit made by the potential homebuyer to show that he or she is serious about buying the house.
Example: When serious about purchasing a house, the buyer might put down a deposit, which is then credit toward the down payment and closing costs.
The difference between the fair market value (appraised value) of your home and your outstanding mortgage balances and other liens.
Example: If the value if your house is $100,000 and you own $80,000 on your mortgage, then you have $20,000 equity.
An escrow account is an account held by a third party that saves and allocates money for property taxes and homeowner’s insurance. Typically, if you have an escrow account, a portion of your mortgage payment will go to the lender and a portion will go to the escrow service.
Escrow accounts are designed to protect the lender and make things easier for the homeowner.
A home loan with a predetermined fixed interest rate for the entire term of the loan.
When rates are low, it’s great to lock in that low rate. If they are high, it may be useful to explore refinancing in the future when rates are low again.
A thorough inspection by a professional that evaluates the structural and mechanical condition of a property.
They will investigate the roof, look for cracks in the foundation, ensure the furnace is in good shape, and more.
Insurance to protect your home against damage from fire, hurricanes and other catastrophes. Usually, homeowners insurance also covers you against theft and vandalism, as well as personal liability in case someone is hurt or injured on your property.
Homeowners insurance is required when you have a mortgage. It may be helpful to group your auto, home, and life insurance together for a better deal.
The process by which a mortgage lender makes a home loan and records a mortgage against the borrower’s real property as security for repayment of the loan.
Basically, this is the entire process of obtaining a mortgage from the moment an application is taken, through underwriting, to final loan closing.
A legal document giving a lender a lien on real estate to secure repayment of a loan. Mortgage loans generally run from 10 to 30 years, after which the loan is required to be paid off. Also called deed of trust and/or security deed.
A mortgage is just a name for a loan to buy a house with the house as collateral. Collateral is property used to help secure a loan. If the loan is not paid, the lender may be able to take control of the property.
Private Mortgage Insurance (PMI)
Mortgage Insurance is an insurance policy which compensates lenders or investors for losses due to the default of a mortgage loan.
Sometimes a PMI can allow you to pay a smaller down payment. PMI allows you to build up enough equity so that the lender could sell it and get their money back if the loan isn’t paid.
A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.
This is the commitment that locks in the sale.
Real Estate Settlement Procedures Act (RESPA)
A consumer protection law that, among other things, requires advance disclosure of settlement costs to home buyers and sellers, prohibits certain types of referral and other fees, sets rules for escrow accounts and requires notice to borrowers when servicing of a home loan is transferred.
RESPA is a law that was created to protect homeowners and keep the process transparent.
Right of first refusal
A provision in an agreement that requires the owner of a property to give another party the first opportunity to purchase or lease the property before he or she offers it for sale or lease to others.
Often, a property owner may give the right of first refusal to a neighbor or a business investor who has a stake in the property.
The number of years it will take to pay off a loan. The loan term is used to determine the payment amount, repayment schedule and total interest paid over the life of the loan.
This is the full length of time that the parameters of the mortgage will have legal effect.
An interest rate that may fluctuate or change periodically, often in relation to an index such as the prime rate or other criteria. Payments may increase or decrease accordingly.
A variable rate is similar to an ARM, however there is one key difference. With an ARM, as the interest fees change so does the monthly repayment amount.