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Mortgage Glossary

Searching for a new home can be enjoyable, however, procuring financing through a lender can often be intimidating. Understanding some of the common financing terminology used in the mortgage industry can smooth out some of the process for you. We have defined for you some commonly used mortgage terms.

Adjustable-Rate Mortgage (ARM)

A type of home loan in which the interest rate changes according to a standard financial index. ARMs can start off lower than a fixed-rate mortgage, but will change over time.

Annual Percentage Rate (APR): The APR for a home loan is an annual calculation that includes the interest rate quoted by your mortgage company plus any additional home loan costs such as origination fees and points.

Appraisal

The value of the property according to a professional appraiser estimate.

Assessed Value

The value of a home according to the county the property is located in. This value determines how much the borrower will pay in property taxes.

Closing Costs

Expenses like taxes, escrow payments and title insurance that buyers and sellers incur while transferring ownership of a home.

Down Payment

Amount paid in cash for a property outside of a mortgage. You will lower your monthly mortgage payment by putting more cash down up front. Mortgage loans for a purchase can be obtained with as little as 3.5% down.

Equity

Value of the house minus the present balance of a borrower’s mortgage equals equity the borrower has. In some cases a property will have no value or a negative value.

Escrow

A portion of the mortgage payment that is kept in a trust by the mortgage company and used to pay the homeowners insurance and taxes when due. Not all loans have escrow accounts.

FHA Loan

A mortgage insured by the Federal Housing Administration. FHA loans allow prospective buyers who can’t otherwise afford a large down payment to secure financing.

Fixed-Rate Mortgage

A type of home loan where the interest rate will stay the same throughout the entire life of the loan term.

Loan Estimate

An important form that contains all the estimated costs a borrower will pay for a home loan or refinance.

Loan to Value (LTV): This term refers to the relationship of the amount financed to a home’s appraised value and is expressed as a percentage. For example, an $80,000 mortgage for a home with an appraised value of $100,000 has a LTV of 80 percent. To calculate the LTV you divide the amount of the loan by the property’s appraised value. This is important because an LTV of more than 80 percent may require the borrower to purchase private mortgage insurance (PMI).

PITI

Stands for principal, interest, taxes and insurance – parts of a mortgage payment.

Rate Lock: Home mortgage interest rates vary from day to day. Because of this a borrower may decide to lock in a particular interest rate with your lender. This rate lock guarantees that your home loan will be processed with this rate, even if the interest rates rise before your loan closes.

Points: There are two types of loan points. Discount points are used to reduce the loan’s interest rate and an origination point may be added to cover the expenses associated with processing a loan. One point equals one percent of the loan amount. Using a discount point to lower your interest rate by one point on a $400,000 mortgage would require the borrower pay an additional $4,000 for the loan.

Private Mortgage Insurance (PMI): When you finance more than 80 percent of your new home’s value lenders will often require the borrower to purchase PMI as a protection for the lender against loss if the borrower later defaults on your home loan. The monthly PMI payment is added to your mortgage payment.

Title: “Title” is a collective term for all of a person’s legal rights to own, use and dispose of land.  Title includes all previous ownership, uses and transfers. To legally transfer real estate property, a title search must be performed, and in most cases the title must be found free of any circumstances that could endanger your right of ownership.

Title Insurance: Title Insurance is a requirement that protects both the buyer and the seller against legal defects in a home’s title. A title policy ensures that a property owner has the legal right to transfer a home’s title to the seller. If a problem occurs after the transfer, the title company pays the associated legal costs to correct any issues with the title.

Directors Financial Group NMLS# 177087
11 Cushing, Ste 250, Irvine, CA  92618
Toll Free:  (877) 492-9173
services@dfg1.com
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