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Adjustable Rate Mortgage
Also known as a variable rate mortgage this financial
product has a variable interest rate that fluctuates
according to the financial index used to calculate it.
Some adjustable rate mortgages are capped in order to
protect the financial welfare of the borrower i.e. the
interest rate never goes above a pre-arranged amount.
Amortization
The act of paying off a mortgage or another form of debt
through regular payments over a set period of time. Each
payment, usually made on a monthly basis, is split
between paying the principal and the interest on the
loan.
Amortization Schedule
An in-depth breakdown of the amortization of a loan.
Commonly set out as a table, the schedule shows the
monthly payment amount, the interest charged and the
principal still left to pay i.e. the outstanding
balance, for the term of the loan.
Annual Percentage Rate (APR)
The rate of interest that is charged on the principal of
a mortgage for the projected life of the loan. Lenders
must by law (Truth in Lending Act) disclose the APR of a
mortgage before an application is approved. APRs
associated with adjustable rate mortgages can go up or
down throughout the course of a year.
Assumption
A three-way agreement made between a buyer, a seller and
a mortgage lender whereby the buyer assumes liability
for an outstanding mortgage on a property. This type of
agreement lowers costs for both the buyer and seller
i.e. no closing costs, however the buyer has to qualify
for the mortgage before approval is given.
Balloon Mortgage
A type of mortgage product that requires a large lump
sum payment at the end of the loan terms. This final
payment is generally much higher than the regular
payments made throughout the life of the loan, but
allows the regular monthly payments to be lower than
those of a normal mortgage.
Bi-weekly Mortgage
A type of mortgage product that requires payments to be
made every second week (bi-weekly) rather than once per
calendar month. This allows the principal of the
mortgage to be paid off more quickly, so saving money in
the form of interest charges over the course of the
loan. The regular payment for a bi-weekly mortgage is
generally half the payment of a monthly mortgage.
Bridge Loan
A short term loan used to pay fees, charges and mortgage
payments on a new property while proceeds from the sale
of a prior property are being made available i.e. it
bridges the gap.
Cap
A limit imposed by the lender that determines the degree
to which the interest rate of an adjustable mortgage can
increase either annually or over the life of the loan.
There are four main types of cap, each of which is
designed to protect the financial welfare of the
borrower:
• Payment caps specify the maximum monthly payment that
will ever be expected
• Interest caps put a limit on the interest rate of the
mortgage
• Annual caps limit the degree to which the interest
rate can increase over the course of a year
• Life-of-loan caps put a limit on the degree to which
the interest rate can increase over the entire term of
the mortgage.
Closing Costs/Settlement Costs
A variety of fees and charges that are payable by both
buyers and sellers in order to finalize the purchase of
a property. When calculated the closing costs often
equal around 10% of the mortgage value.
Closed end Mortgage
A mortgage in which the principal sum i.e. the amount
borrowed from the lender, is fixed and cannot be
increased during the life of the loan e.g. a further
amount can’t be borrowed at a later date for home
improvements or debt consolidation.
Commitment Fee
A fee charged to a borrower when a mortgage lender
agrees to lock a mortgage at a specific interest rate
and points. This guarantees the amount of future
payments and offers stability to the borrower.
Convertible Mortgage
An adjustable rate mortgage product that offers the
option of converting to a fixed interest rate i.e. a
fixed rate mortgage, at any point during the life of the
loan. Some lenders do not allow conversion within the
first 3-5 years of the loan however this clause will be
disclosed in the mortgage agreement.
Co-mortgager
A person who is legally obliged to pay a mortgage loan,
either singly or as part of a couple, and who shares
rightful ownership of the mortgaged property.
Co-signer
A person who is legally obliged to pay a mortgage loan
in the event that the borrower defaults, but has no
ownership rights to the property.
Curtailments
A benefit offered with some mortgage products that
allows the borrower to make additional payments before
they are due, thus paying off the loan over a shorter
period of time. Most lenders don’t offer this privilege
though and can charge a fee for early repayment.
Discount Points
Cash amounts paid to a lender by a borrower in order to
decrease the interest rate on a mortgage loan. So for
example, buying one discount point would cost a borrower
1% of the mortgage amount and will secure a slightly
lower interest rate. The more discount points that can
be bought at the start of the mortgage loan the better
the interest rate throughout the life of the loan.
Down Payment
The amount of cash that a buyer initially puts down
towards the purchase price of a property. The remainder
of the purchase price is then covered by the mortgage
loan. Down payments are generally made with cash savings
and become equity as soon as they are put towards the
price of a property.
Due-on-sale
A common mortgage clause that entitles the lender to
demand immediate payment of the outstanding loan balance
should the property be sold.
Escape Clause
A clause within a property sale contract that allows one
of the involved parties (buyer or seller) to pull out of
the transaction should a necessary event fail to happen
e.g. if the buyer fails to secure finance through a
mortgage in a specified period of time the seller has
the right to pull out of the sale.
Fixed Rate Mortgage
A mortgage product that maintains a fixed interest rate
throughout the life of the loan.
Good Faith Estimate
An estimate of the closing costs and the minimum monthly
payment that is made by a mortgage lender within 3 days
of a buyer’s mortgage application being made.
Graduated Payment Mortgage
A fixed rate mortgage product that benefits from low
monthly payments in the initial years. Following these
years the monthly payment gradually increases until a
level is reached that is sufficient to clear the loan
during the amortization period.
Interest Rate
The amount charged by a mortgage lender on the principal
sum borrowed. Interest rates are expressed as a
percentage and are normally calculated on an annual
basis.
Jumbo Loan
Also known as a non-conforming loan, this type of
mortgage has a principal that exceeds the limit stated
by the FNMA (Federal National Mortgage Association) and
the FHLMC (Federal Home Loan Mortgage Corporation).
Jumbo loans usually have a repayment term of 30+ years.
Loan-to-value Ratio
The amount of a proposed mortgage principal expressed as
a percentage ratio to the value of the property in
question. So for example a property valued at $200,000
with a mortgage principal of $150,000 would have
loan-to-value ratio of 75%. Mortgage lenders rarely
exceed 80% loan-to-value; the remainder of the purchase
price being paid as a down payment.
Lock-in
The ability of a mortgage lender to lock the interest
rate and points of a mortgage product at a specified
level for a limited period of time.
Modification
Any change to the terms and conditions of an existing
mortgage contract e.g. an increase or decrease in the
interest rate. The lender is obliged by law (Truth in
Lending Act) to inform the borrower of all changes even
though the borrower has no power to stop the proposed
changes.
Mortgage Broker
A financial expert who specialises in finding the best
mortgage products for potential buyers. Mortgage brokers
often have access to mortgage products that the general
public don’t and can therefore arrange beneficial terms.
Negative Amortization
A situation whereby the mortgage lender is charging more
interest each month on the principal amount than the
borrower is paying. The unpaid interest is constantly
added to the principal so that the borrower can end up
owing more than they originally borrowed.
Open-end Mortgage
A mortgage product that allows the borrower to borrow
additional cash sums against the value of the property
during the term of the loan. These cash sums are often
used to pay off high-interest debts e.g. credit cards or
for home improvements.
Principal
The actual amount of money borrowed by a property buyer
from a mortgage lender. This sum does not include fees,
charges or interest.
Truth in Lending Act
A federal law that state all mortgage lenders must fully
inform potential borrowers about the fees, charges and
interest rates associated with any form of consumer
credit. Mortgage lenders must provide this information
within 3 days of an application being made.
Uniform Settlement Statement
A simple document that contains all relevant information
pertaining to closing. The document has to be provided
to both the buyer and the seller of a property according
to the Real Estate Settlement Procedures Act.
Warranty Deed
A legal document presented to a homebuyer that protects
them from future claims to their property.
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