Glossary : Finance

Adjustable Rate Mortgage (ARM)

Also known as a variable rate mortgage this type of mortgage, with this type of loan your interest rate and resulting monthly payment will depend upon the prevailing market interest rate.

Amortization

How the money you pay towards your mortgage payment is separated into the interest portion and the principal portion. In a fully amortized loan the interest portions decrease over time as the principal portion increases. So you are paying back more of the money you borrowed and not just the interest.

Debt to Income Ration (DTI)

This ratio shows the lender how much of your income is available for a mortgage payment. Many conventional loans use the ratio 28/36.

Discount Points

In general a point is 1% of the amount of money you are talking about. In mortgages a discount point is 1% fee you can pat at the time of closing for a discounted interest rate. If you are quoted a 7% interest rate, if you pay a point your rate will drop to say 6.875. You can pay 4-5 points if you want to.

Fixed Rate Mortgage

With a fixed rate mortgage the original % percent of interest that you agree to at the beginning of your loan remains consistent throughout the life of your loan.

Full Documentation “Full-Doc” Loan Program

A “Full-doc” loan program, is when you document the income required to qualify for the mortgage with either W-2 form, a 1099form, or two years of tax returns.

Good Faith Estimate (GFE)

This is the document that the mortgage broker/lender is required by law to send to you within three days of taking your application. The GFE will tell you the rate and terms of the mortgage being offered as well as outlining all anticiapted closing costs of buying your home.

Interest

Is the portion of your monthly mortgage payment that is paid toward the interest, the rate and type of your interest is decided when you choose a mortgage and lock a rate.

Interest Rate

The price you pay for the use of money you are borrowing.

Loan to Value (LTV)

This ratio compares how much you are borrow ring vs. how much the property is worth. LTV is used as a risk indicator for the lender, the higher the LTV the more risky.

Mortgage

A mortgage is a loan someone obtains which is secured by real estate or another valuable asset.

Pre-Approval

When trying to determine how much a lender would allow you to borrow, you give the loan officer your social secretly number and they pull your actual credit. They will then tell you based on your actual income and debt what you personally the maximum amount you could borrow from a lender.

Pre-Payment Penalties

This is the fee that is charged to you by the lender for either selling, paying off, or refinancing for a set amount of time, usually 1-5 years. Most often prepays are often imposed when the lender offers competitive terms to somewhat risky buyers. A prepay guarantees the lender will make a minimum amount of money on your loan.

Pre-Qualified

When trying to determine how much a lender would allow you to borrow, you give the loan officer hypothetical credit scores and financial information that you think matches yours and they tell you what an average borrower you have described would qualify for.

Principle

Part of each monthly mortgage payment that is actually reducing the size of your loan.

Underwriting

Refers to the produces that the bank or other financial institution uses to judge whether you are capable of repaying the debt. This generally includes reviewing your credit, and the state of your finances.

Reserves

Is at least 3 months of mortgage payments in liquid assets. Some lenders require seasoned reserves which is money that has been in the bank for a certain amount of time.

RESPA

Respa stands for the Real Estate Settlement Procedures Act. It was established in 1974 to protect the borrower from unfair lending practices and requires lenders to disclose certain information to the potential borrower in a timely fashion.

Stated Income Loan Program

A stated income loan program allows you to simply state what your income is without documentation or verification. Interest rates on these types of loans are usually higher, unless your credit scores are over 720.

Truth in Lending

Truth in Lending is a federal law passed to protect consumers. It requires lenders to provide clear disclosure of key terms and costs, including specifying the maximum interest rate on variable rate mortgages.