Mortgage Glossary Continued | Home Loan Terms

Mortgage Loan Terms Defined

Mortgage glossary page 3 defines mortgage terms used in plain language for borrowers who want to understand the mortgage process and loan documents. Homebuyers often are overwhelmed by the home buying process and all the terms that are used. Therefore, this page is offered to assist homebuyers along the path of obtaining a mortgage.

Floating Rate

The interest rate on a loan waiting to close may float up down until five days before closing at which time it is locked.

Loan Estimate

Mortgage lenders must provide a Loan Estimate of your closing cost within three days of your loan application. This document shows an estimate of all loan costs. It is useful for comparing mortgage loan offers from different lenders and for verifying costs at closing.

HUD Settlement Statement

A government form that is issued at the closing and indicates all of the costs of the real estate transaction. The closing disclosure matches the final closing statement so you can compare what was disclosed to you and what you are actually being charged.

Homeowners Insurance

Protects the buyer and the lender against hazards and losses caused by fire, vandalism and some natural causes. Homeowner insurance does not cover damage caused by rising water which requires separate flood insurance. Insurance policies may have deductibles such as a 2% deductible for hurricane damage. That means if your $300,000 house is damaged by a hurricane you must pay the the first $6,000 yourself.

Index

A published interest rate, such as the prime rate, LIBOR, T-Bill rate, or the 11th District COFI. Mortgage lenders use indexes to establish interest rates charged on mortgages or to compare investment returns. When ARM loans adjust, a predetermined margin is added to the index to determine the new rate. The index used is indicated in the mortgage loan note.

Inspections

Depending upon the property's location or condition, some mortgage lenders may require an additional inspection of the property. In southern climates, for example, pest or termite inspections are commonly required. If the mortgage lender suspects building code violations, it may require a certificate of compliance from local authorities for a particular property. Of course, all inspection reports must be carefully reviewed.

Home inspections are always a good idea for the homeowner and generally your Realtor will recommend a good home inspector. These inspections can find problems in the house and you can renegotiate the price or demand the problems be fixed if there are extensive repairs needed.

Junk Fees

Miscellaneous fees that mortgage lenders charge for processing mortgage loans. For example, these fees may be called underwriting, processing, courier, loan origination fees, and document preparation or service fees. Junk fees are highly negotiable so be sure to question the fees when they are disclosed to you on the Loan Estimate.

Lien

A legal claim or attachment against real property for money owed. A mortgage represents a lien on your property. Trades people who have worked on your house may file a lien if they are not paid.

Loan to Value Ratio

The loan to value of a loan is the amount of the loan divided by the value of the property being loaned on. The purchase price or appraisal determines the value, whichever is less. Thus, a house with a $300,000 value and a $60,000 down payment has a loan to value of 80%. (Loan of $240,000 divided by $300,000 = 80%.

Negative Amortization / Deferred Interest / Level Payment

Mortgage glossary for borrowers. Some mortgage lenders formerly offered these mortgage loans as adjustable rate loans. The increase in payments is limited and interest can be added to the principal of the loan. Thus a homebuyers can have a larger loan at the end of five years than when they started the loan. When discussing any type of adjustable rate loan with a mortgage lender be sure to ask whether it has the negative amortization feature. You do not want this type of loan.

Points

Points are sometimes called discount fees, these fees charged up front by a mortgage lender. One point is equal to 1 per cent of the loan amount. These fees usually include loan origination fees and discount points. Typically points amount to 1% to 3% of the loan amount. Be careful that they are quoting you the total points and ask to see a "Good Faith Estimate" on each loan offer before signing up. (see See also APR)

Prepayment Penalty

A prepayment penalty is a fee charged by a mortgage lender if a loan is paid off early. These fees are becoming more popular for certain residential mortgage loans, so borrowers should ask about a possible prepayment penalty before deciding on a lender. You do not want a loan with a prepayment penalty.

Private Mortgage Insurance (PMI)

Most mortgage lenders require PMI insurance for loans that exceed 80% of the home's value. The insurance protects the mortgage lender, but the borrower pays a premium of .5% to 1% up front and a monthly charge. This insurance allows the borrower to obtain loans for which they would not ordinarily qualify.

Rate Cap

The rate cap is the limit on the amount an interest rate may change for an adjustable rate loan. For example, the term 2/6 means the rate may change up or down a maximum of 2% per year and 6% over the life of the loan.

Rate Lock

A rate lock is when a mortgage lender agrees to protect the interest rates, points, and term of the loan while it is processed. The borrower is usually asked to sign a rate lock form agreeing to the interest rate and the term of the interest rate lock. Depending on the length of the rate lock, you may be required to pay a fee to lock the loan and the interest will be higher than today's rate.

Survey

A survey shows the exact outline of the property, including lot lines and placement of any improvements. Surveys are useful in determining if any encroachments exist. These can be a source of litigation or other difficulties affecting clear title.

For example, a neighbor's garage may extend over the property's lot line, resulting in possible legal complications. Surveys also identify property correctly. A survey from a registered surveyor may be required when large parcels of land have been divided or when irregularities, such as streams or hills, affect the land.

Title

A document that shows evidence of ownership of a piece of property. The title is usually associated with a deed to the property that shows the history of ownership.

Title Insurance

Title insurance is designed to protect the buyer against defects in the title of the property being purchased. Defects may include encumbrances to the property such as tax liens or past improper conveyance of the property.

Depending on the local practices, the buyer or the seller may pay for title insurance.

Zero or No Closing Cost Loans

In this case borrowers trade a higher interest rate on their mortgage loan for lower closing costs. These loans make sense for refinancing and when the borrower expects to have the mortgage for only a short period. This is the opposite of a buy down.