A Guide to Mortgage Terminology

When visiting a foreign, exotic location, you always try to learn at least the basic terms of the country. Well, one could argue that the mortgage industry is definitely a foreign world. Before visiting, you should have an understanding of the following terms.

A deed-in-lieu is a subject you really want to avoid, but it is coming up more and more. When a borrower is about to be foreclosed on, a lender will sometime take this deed. The borrower loses the home, but avoids the cost of foreclosure.

If you are cash rich at the closing, you might want to investigate paying a discount point. It is the equivalent of one percent of the loan amount. By paying it, you can pay down the interest rate on the loan and save money over time.

When is the best time to start the loan process? This is a common question and leads us to the term pre-approval. You want to get pre-approved for a loan and lock in an interest rate. This allows you to shop for a home knowing exactly what you can spend.

The mortgage application is pretty much what it sounds like. It should be viewed, however, as only the first step in the process. You can expect the lender to ask for additional information and documentation.

The adjustable rate mortgage, better known as an ARM, is a common mortgage loan that has an interest rate that adjusts according to some index such as LIBOR. The interest rate can go up or down, but usually has a cap on how much it can move in a certain period of time.

There are a number of quasi-government lenders. Fannie-Mae is one. It does not lend to the public directly, but guarantees loans made by lenders to certain types of lenders, often first time buyers or low-income borrowers.

A mortgage loan is really a calculation of risk. Some lenders try to lower their risk by requiring borrowers to maintain a “cash reserve”. This is an amount of money held in a bank account and is often equal to three months of your total expenses.

Depending on the part of the country you are in, the conclusion of the real estate transaction will be known as closing or settlement. The property is transferred and you formally take on the mortgage debt. It is both a glorious and stressful day!

Private mortgage insurance is an annoying aspect of buying a home. It protects lenders from some of the losses that can happen if a borrower defaults, but the borrower is required to pay for it! Put more than 20 percent down and you can avoid it.

Visiting a country where you don’t understand a word being said can make you feel bashful and intimidated. The same goes with dealing with lenders. This can lead to unfavorable loans. Take the time to learn the lingo, and you can avoid such problems.

Get more information on mortgage loans at FSBOAmerica.org.
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