Home Loan Glossary of Terms
Everything has it’s own language these days . . . computers, insurance, motorcycles, sports, and the business of mortgages and home loans is no different. Okay, so it’s not a complete language which is spoken only by the chosen few, but there are a few terms which you might not really understand, even if you nod, smile and pretend that you do. That’s dangerous behavior, so read on and learn a few vital words and phrases.
Adjustable Rate Loans – are loans with adjustable rates. You see, it’s not rocket science, but don’t be lured into a false sense of security with these potentially dangerous honey pots . . . they’ll usually start you off with a lower interest rate than you could get on a fixed rate loan then bam . . . . Don’t worry too much though, there’s often a maximum and a minimum set limit and when the interest rates go up, so do your payments, and when it goes down so do your payments.
Annual Percentage Rate (APR) – is the cost of the credit when it’s expressed yearly and includes points, brokers fees and other credit charges as well as the interest rate.
Conventional Loans – are loans which are not guaranteed or insured by any government agency like the Federal Housing Association (FHA), Rural Development Services or Veterans Administration.
Escrow – is one which you might come across and be a little unsure of. It simply means the holding of documents and/or money by a third party (neutral) before the deal is closed. It can also be used to refer to an account which is held by the lender and into which the holder/homeowner pays the money for the insurance and taxes.
Fixed Rate Loans – are loans in which the rates are fixed. It doesn’t matter whether the loan is for a term of 10, 20 or even 30 years, the monthly payments and the interest rate stay the same for the whole period.
Interest Rates – is how much it is going to cost you to borrow the money. These do change according to market conditions.
Lock-In – is a written guarantee for a specific interest rate providing that the deal is done and dusted within a set period of time . . . maybe 30, 60 or 90 days. Often this will also specify the number of points which must be paid on closure.
Points – are the fees which you must pay to the lender for the loan. Generally speaking, one point is the equivalent of 1 percent of the total loan amount. These points are often paid at closing in cash. You might be able to borrow the money to pay the points, but that all costs you more in the long run.
Private Mortgage Insurance – (aka PMI) is protection for the lender if the borrower doesn’t pay the loan, ie defaults. If you put down less than 20% of the value of your home as a down payment then you’ll usually need to take out PMI, yes, I said PMI, not PMS or PMT, PMI, get it!! Angry, I’m not angry, what makes you say that . . .
Transaction, closing or settlement costs – should include lots of other fees; title examination, application fees, title insurance, abstract of title, property survey fees, attorneys fees, settlement fees, notary, recording fees, credit report fees . . . in fact, any damn fee you can think of, and possibly a few you can’t.