Adjustable Rate Mortgage (ARM)
A variable or flexible rate mortgage with an interest rate that adjusts periodically according to the financial index it is based upon plus a margin. To limit the borrower¹s risk, the ARM may have a payment or rate cap.
Amortization Schedule
An amortization schedule is a complete table detailing the amount of principal and the amount of interest that comprise each payment in order for the loan to be paid off by the end of its term. Amortization is the process of paying off a debt over time through regular payments.
Bankruptcy
A proceeding in a federal court in which a debtor (who owes more than his/her assets or cash flow) is relieved from the payment of debts. This can affect the borrower’s personal liability or the mortgage debt but not the lien of a mortgage.
Buy-Down
Where the buyer pays additional discount points in return for a below market interest rate; or the buyer or seller deposits sufficient funds with the lender to reduce the rate during the first one to three years of the loan; or pays closing costs such as the origination fee. During times of high interest rates, buy-downs may induce buyers to purchase property they may not otherwise have purchased.
Closing
A transaction in which the formalities of a Real Estate sale are concluded. The certificate of title, abstract, and deed are generally prepared for the closing by an attorney and this cost charged to the buyer. The buyer signs the mortgage, and closing costs are paid. The final closing merely confirms the original agreement reached in the agreement of sale.
Down Payment
The down payment is the amount of money that a buyer pays upfront to offset the purchase. The payment is only a percentage of the full amount and is typically between 5% and 25% of the purchase price of the property.
Default
Failure to make mortgage payments as agreed to in a commitment based on the terms and at the designated time set forth in the mortgage or deed of trust. It is the mortgagor’s responsibility to remember the due date and send the payment prior to the due date, not after. Generally, thirty days after the due date if payment is not received, the mortgage is in default. In the event of default, the mortgage may give the lender the right to accelerate payments, take possession and receive rents, and start foreclosure. Defaults may also come about by the failure to observe other conditions in the mortgage or deed of trust.
Escrow
Escrow is when a third party holds property, cash and the property title until all conditions of the property agreement have been satisfied. The third party, likely a lawyer, will then hand over the assets to the respective parties, as outlined in the agreement.
Fannie Mae/Freddie Mac
The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are government-sponsored enterprises that purchase mortgages from lending institutions.
Fair market value
The price established in a free market between a buyer and seller in an arms-length transaction where neither one is compelled to buy or sell. In an appraisal, this is the final value derived after examining the Sales Comparison, Cost, and if applicable, Income approaches; sometimes referred to as “Market Value.”
Flipping
Flipping is a real estate investment strategy with the goal of purchasing a property to re-sell it for a profit. Investors hope to make a profit from price appreciation that occurs in a hot housing market and/or from the renovations and capital improvements made to the property.
Good Faith Estimate
A good faith estimate is an approximation of the fees due at closing. It must be provided by the lender to a borrower within three days of the lender accepting the loan application. It is provided before the mortgage loan is secured so the homebuyer can compare the offers of different lending products.
Interest Rate
The simple interest rate, stated as a percentage, charged b a lender on the principal amount of borrowed money.
Lien
A lien occurs when a legal claim is put on a property in order to receive payment for debt or for services rendered. The lien remains in place until the debt owed by that person is settled. The holder of the lien can sell the property in order to recover the money owed.
Pre-Approval
The pre-approval process includes an evaluation of a potential borrower’s income and expenses. This evaluation helps determine whether the borrower qualifies for a loan from the lender, or the maximum amount that the lender is willing to lend.
Prequalification
A prequalification is an evaluation of a potential borrower’s credit worthiness. This evaluation is used to help estimate the amount that the potential borrower can afford to borrow.
Prime Rate
This is the interest rate that commercial banks offer to their best customers. This generally means large corporations that are the most creditworthy.
Underwater
When a property’s market value is less than the balance of the money owed on the mortgage. This is usually associated with drastic falls in the market value of the property.
Underwriting
The process a lender undergoes in determining whether to extend credit. A lender makes its decision based on a variety of factors including the borrower’s credit scores, credit history, income, other debt obligations and property value.
Points
Mortgage points are upfront charges the lender may add to the overall price of the mortgage. One point is equal to 1% of the total amount of the loan.
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