Koehler Real Estate, LLC provides buyers and sellers with easy to understand real estate related mortgage terms and definitions. Most real estate professionals employ this real estate language in their everyday use. It is important for buyers and sellers to have a good understanding of these real estate and mortgage terms. This additional knowledge will provide buyers and sellers a smoother process when buying or selling a home.
Mortgage Terms A-Z
Acceleration Clause – A clause in a mortgage that allows the lender to require that the full amount of the principal become due and payable in advance of the payment date in the event the borrower defaults on the loan.
Adjustable Rate Mortgage (ARM) – A mortgage in which the interest rate is subject to change periodically, based on fluctuations in a designated market index. Monthly payments can increase or decrease at set intervals and according to a margin determined by the lender. The initial interest rate on a loan is typically lower than a fixed rate mortgage.
Amortization – The process of paying off a loan in equal periodic payments through installments of principal and interest over a specified time period. Each loan payment includes a portion of principal and a portion of interest, with a greater amount gradually paid towards the principal.
Closing costs – The closing costs are mortgage transaction fees, title fees and real estate fees that are paid by a borrower and seller at the closing where the transfer of ownership takes place. Typically these include an origination fee, fees for the title search and insurance, deed recording, discount points, appraisal, credit report, survey, taxes and other settlement-related costs. Closing costs usually constitute about three percent to six percent of the sales price of the home.
Conventional Loan – A secured loan on real property typically with a fixed mortgage rate. This type of mortgage is not insured or guaranteed by HUD. It also follows the guidelines set forth by Fannie Mae and Freddie Mac.
Discount points – An additional payment made to the lender to either reduce a prepayment term or lower an interest rate on a mortgage. They are typically paid at the closing.
Federal Deposit Insurance Corp (FDIC) -The Federal Deposit Insurance Corporation. FDIC is an independent U.S. federal agency created under the authority of the Federal Reserve Act to preserve and promote public confidence in banks. It is an agency that governs bank insurance funds and insures deposits at banks and other financial institutions up to $250,000 per account.
FHA loan – A mortgage loan insured by the Federal Housing Administration of the Department of Housing and Urban Development (HUD). This loan is offered to qualified home buyers and issued by approved lenders who adhere to FHA guidelines and regulations. While the FHA places price range limits on the loans, the parameters are flexible enough to accommodate many buyers.
First mortgage – The first mortgage, usually determined by the date in which it was recorded, will be repaid before any other mortgages that are recorded against the property. It has the first claim in the event of default and takes priority over any other liens which are considered financial encumbrances with the exception of property taxes.
Fixed-rate mortgage – A mortgage loan that has a fixed rate of interest for the life of the loan. A higher rate of interest is usually charged for this type of residential loan, which most commonly is available in 15 and 30-year terms.
Good Faith Estimate (GFE) – A written estimate of closing costs that is required by the Real Estate Settlement Procedures Act (RESPA) to be disclosed to mortgage loan applicants within three days of filing a mortgage application. The estimate includes all closing fees such as lender charges, settlement charges, property taxes, homeowners insurance, and customary real estate related closing costs.
Hazard insurance – An insurance policy that is designed to protect a homeowner and lender against loss and/or damage to a home or property caused by natural disasters or physical damage such as fire, wind, and vandalism.
HELOC – An acronym that stands for Home Equity Line Of Credit. A HELOC is a revolving line of credit with certain limitations that works similar to a credit card. Your home is the collateral and this loan is typically a second position lien.
Loan processing fee – A fee imposed by a lender for the acceptance of a loan/mortgage application and for gathering the necessary information to process the loan.
Margin – The amount in percentage points that a lender adds to the market index to calculate the final interest rate. If the index is 7 percent and the margin is 2.50 percent, the final interest rate would be 9.50 percent.
PMI – An acronym that stands for Private Mortgage Insurance. Issued by a privately owned company, it protects a lender from loss in the event a borrower defaults on the loan. Typically, PMI is required when a buyer puts down less than 20 percent of the sales price, or when an amount being refinanced is greater than 80 percent of the appraised value. Once the homeowner has 20% equity in their home, either by continued payments, appreciation, and/or a combination of both the monthly PMI is no longer required.
Pre-Approval – A process by which a prospective home buyer gets formally approved for a mortgage. It is a method of analyzing a home buyer's financial situation to determine creditworthiness and their ability to pay back a loan. Getting pre-approved by a lender gives a potential home buyer a stronger position when making an offer on a home because it shows the seller that a lender has essentially promised the buyer a certain amount of funds for the mortgage.
Prepaid expenses – Future costs and disbursements that are recurring and paid before the due date. Typically, they are included in the closing costs. Examples of these items are property taxes, assessments, insurance, and interest. Sometimes payments for these costs are placed in an escrow account for future payments.
Prepayment penalty – A penalty charged to the borrower by the lender for paying off the balance of a loan before the end of the term. This is a clause in some mortgage contracts to discourage borrowers from refinancing the loan or selling the home too quickly.
Pre-Qualification – An informal process by which a potential home buyer can get an estimate on how much money a lender might consider loaning for the purchase of a home. The formula used to determine how much home a buyer can afford takes into consideration income, debt, credit history and savings. However, since the prospective buyer has not actually applied for a loan, getting pre-qualified merely provides an estimate of the amount of the mortgage that may be received.
Second mortgage – A second residential loan that ranks below a home buyer's first mortgage. It is always subordinate to the first mortgage.
Secured loan – Typically, a general purpose loan backed by a borrower's assets such as a home or automobile. If the borrower defaults on the loan, the lender has the right to seize the collateral and sell it to satisfy the loan debt.
Subordinate loan – A second or third mortgage that has a lower priority than a first or original mortgage.
Term – The time schedule that is contracted by the lender and the borrower for repayment of a mortgage or other loan, typically 15 or 30 years.
Truth in Lending Act – A federal law enacted to protect consumers, requiring lenders to disclose fully in writing complete details about a mortgage. The details include all terms and conditions, information on annual percentage rate (APR), grace period, any related fees, minimum payment required, and total finance charge. This act makes it possible for borrowers to compare loans from lender to lender.
Underwriting – The process by which the lender or bank assesses the risk involved with loaning money to a prospective borrower based on the property value and the borrower's ability to repay the loan.
Unsecured loan – A loan that is made by a lender with no pledge of collateral required. An advance of funds that poses a higher risk to a lender and is backed up only by a borrower's agreement to pay. Since the loan is not secured by collateral, interest rates are typically higher than that of a secured loan.
Upside-down loan – When the balance of an outstanding mortgage loan is greater that the fair market value of a home. This is also known as an "underwater" loan. If a homeowner would decide to sell their home, we call this a "short sale".
VA loan – A loan issued and guaranteed by the Department of Veterans Affairs (VA) that is long term and requires little or no down payment. It is only available to qualified individuals who have served in the military or are eligible through other entitlements. Qualifying veterans must produce a "Certificate of Eligibility".