Loan Terminology

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Learn about common loan terminology

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Loan Terminology - Subtopics

· Common Mortgage Terms
· Common Terms Explained
· Glossary of Mortgage Terms
· Multiple Meanings in Terminology

· ARMs Explained
· Good Faith Estimates
· About Application Packets

Common Mortgage Terms
What are some common mortgage terms I should know before I apply for my loan?

Every industry has certain terminology that is used and the mortgage industry is no different. Here is a run down of some regular loan terminology.

Some of the more common terms include PITI, PMI, and title. If you enter the loan process already familiar with these terms, it will help you down the road when other jargon is thrown your way.

PITI is an acronym for the way your mortgage payment will be divided up: Principal balance, Interest, Taxes, and Insurance. You monthly mortgage payments are divided up into these four categories unless you pay your own property taxes or insurance.

PMI is an acronym for Private Mortgage Insurance, which is also sometimes referred to as foreclosure insurance. This insurance is paid by the borrower and is required by most lenders when a substantial down payment (around 20 percent) isn't made. PMI is not required on all mortgage loans, such as VA guaranteed loans.

The title of a house refers to the legal ownership of the home. A title search will be done to make sure no one else has legal ownership of the home. For example, a divorced couple may not have removed both names from the title, but a refinance could not be done until one of the names was removed. Having a thorough title search protects everyone involved: the buyer, the lender, and the seller

Being familiar with these terms and other basic mortgage terms can help to protect you from jumping into something you don't fully understand.

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Common Terms Explained
How can I keep from getting confused about all the mortgage terminology?

When the time comes to decide what terms you would like to have on your new mortgage loan, there is plenty of mortgage terminology that will be presented to you.

You will be asked to choose between an ARM and a fixed rate. ARM refers to adjustable rate mortgages and fixed rate refers to mortgages without fluctuating interest rates. An ARM loan has an interest rate that adjusts according to the predetermined loan terms, so even though you may start out with a low interest rate, it can increase over the life of the loan. A fixed rate mortgage does not feature interest rate adjustments, but the initial interest rate is usually higher than the initial rate of an ARM.

You may also be asked about the length of amortization. This is just another way to ask how many years you want to pay on the loan. Common amortizations include 30, 20 and 15 years for first mortgages.

Another option you might be given is whether you want to pay points on your mortgage. Points refer to a method by which you pay a certain amount of money in order to buy down your interest rate. Some lenders allow you to roll the cost of the points into your loan.

If "balloon payment" enters the discussion, it is probably best to avoid it altogether. A balloon payment is a loan which is payable over a certain amortization (for example, 30 years) but comes due sooner (for example, 10 years). Balloon payments are relatively common for investment properties and interest-only mortgages, but you should try to avoid this type of loan for your primary residence.

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Glossary of Mortgage Terms
Can I trust the mortgage glossaries on lender websites?

If you are in the market for a mortgage, then you've probably spent a good amount of time reviewing the websites of various lenders to learn more about the products and interest rates they offer. While you're doing this, you should also review the glossary of mortgage terms that many lenders have on their sites.

You can get a good understanding of some of the terms that you will undoubtedly hear time and again while applying for your mortgage, and most lenders do a good job of presenting a thorough list. You can also find definitions through unbiased organizations, such as the Federal Housing Administration.

Common mortgage terms that you may hear from your mortgage company or bank include:

Amortization: Payments on a mortgage loan for a certain number of years
Debt-to-income ratio: How much money you make versus how much money you owe in monthly debts
Conforming loan: A loan that falls under the amount set by Fannie Mae, which operates in the secondary market and helps banks and mortgage companies with funding.

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Multiple Meanings in Mortgage Terminology
Are some mortgage terms used interchangeably?

Learning mortgage terminology can feel like you're embarking on a second language, so it's important to also know about terms that mean the same thing or have several meanings.

Even though different terms are used, there are mortgage definitions that actually mean the same thing. For example, homeowner's insurance and hazard insurance are essentially the same thing, although a complete homeowner's insurance policy includes liability insurance.

Other terms have more than one meaning. "Escrow" is a word that you will hear often when applying for a mortgage and it means a few things. It can refer to the account that holds funds for homeowner's insurance along with property taxes, while it can also refer to an account which holds funds in advance for closing. If you put down an earnest deposit, for instance, this will sit in an escrow account until closing (an earnest deposit, by the way, is a deposit a buyer gives a seller when bidding on a home).

Be sure to ask for clarification if a mortgage term is not clear or used in a different way than you originally thought.

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ARMs Explained
What do all the numbers mean when referring to ARM loans?

Adjustable rate mortgages (ARM) don't involve a lot of definitions, but you will need to understand the numbers associated with them.

You will see numbers like 3/1, 5/1, and other combinations, and all of these are quite easy to understand once you become familiar with what each number represents.

In the case of ARM loans, the preceding number signifies how long the fixed rate lasts before the interest rate becomes variable. The second number represents how often the interest rate will fluctuate. For example, a 3/1 ARM is a loan which has a fixed interest rate for the first three years of the loan and becomes a variable interest rate for the remainder of the amortization (typically 30 years). This loan will experience an interest rate adjustment once a year, which is what the "1" represents.

How high or how low the interest rate can eventually climb or fall depends on the original mortgage terms and is signified by a numerical "cap." If the 3/1 ARM has a 5 percent cap, this means that the interest rate can never go higher or lower than 5 percentage points of the original interest rate.

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Understanding Good Faith Estimates and VA Guarantees
Do mortgage terms mean the same as they do in everyday conversation?

Buying a home is probably the largest purchase you'll ever make. You want to make sure you understand every detail before you sign on the dotted line. When you're in the process of applying for a mortgage, don't assume you know what something means. Ask your mortgage company.

For example, you might assume that a VA guarantee on a mortgage loan means that the VA guarantees your approval for a mortgage, when in fact the VA has nothing to do with the approval process and you still need to be credit-worthy to get approved.

Another relatively common misconception when it comes to mortgage loan terminology is the "good faith estimate" given by the lender, which is a document that lists the fees associated with the loan. Many borrowers assume that the good faith estimate is more concrete than it actually is, but the estimate can sometimes be very different from the actual total.

Don't assume that you understand everything if you have not received a full explanation of all the terms being used in your application process. Be sure to seek answers to any questions that you may have.

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About Application Packets
What does a mortgage application packet reveal about a lender?

After you apply for a mortgage, you will often receive a packet in the mail from the lender. The packet will include a copy of your mortgage application and information brochures that are designed to assist you through the mortgage application process.

If your lender sends you a copy of a mortgage loan glossary, be sure to take the time to peruse this particular piece of information.

You can learn a lot about a lender based on some of the information within the glossary. For example, if a lender does not include so-called "junk fees" in their loans, they may still define these fees within the glossary and specify that they do not charge these fees. A junk fee is a fee associated with the application, closing, or the servicing of the loan which is not considered necessary and is mostly profit for the lender.

If your lender has a glossary packed with these terms and an accompanying definition of why the fees are necessary, you may want to look for a different lender.

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Mortgage Refinance Calculator

Should you refinance your existing mortgage? This calculator can help you that find out. Enter the specifics about your current mortgage, along with your current appraised value, new loan term, new rate and closing costs. Together, this can determine how much refinancing might save you overall.

· Calculate how much you could save in interest

Note: This information is for general use only. Use this information as part of a full research process. General advice does not always apply directly to individual matters. Please consult a local expert with specific and complex questions about your individual situation.


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