| Real Estate 101 - Mortgage |
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| What is a mortgage? | |
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Mortgage is a type of lien, in which a bank or a person lends the money to buy a property. The property itself is the collateral in a mortgage, so that the lender can take the property if the owner doesn't comply with the mortgage's terms. | |
| What is an Adjustable-Rate Mortgage (ARM)? | |
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Adjustable-Rate Mortgage is a mortgage where the interest rate is not fixed for the life of the loan. These mortgages adjust periodically based on an index that changes with market conditions. The rate of interest is the sum of the index plus a margin ( the margin remains fixed for the life of the loan). | |
| What is a Fixed-Rate Mortgage? | |
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Fixed-Rate Mortgage is a mortgage where the interest rate is fixed for the life of the loan. | |
| What is a First Mortgage or a Primary Mortgage? | |
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A First mortgage or a primary mortgage is the mortgage on a property that is in the first lien position. If there is a foreclosure, the first mortgage or primary mortgage is paid off before any other voluntary liens are paid off. | |
| What is a Second Mortgage or Junior Trust Deed? | |
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A second mortgage or Junior Trust Deed is a loan that is in the second lien position. If there is a foreclosure, the second mortgage or junior trust deed is paid off after the first loan is paid off. | |
| What is a Conforming Loan? | |
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Conforming Loan is a loan where the amount borrowed is within the mortgage limit set by Fannie Mae. | |
| What is a Jumbo or Non-Conforming Loan? | |
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Jumbo Loan or Non-conforming loan is a loan where the amount borrowed exceeds the mortgage limit set by Fannie Mae. The interest rates charged on these loans are usually higher than the same on Conforming Loans. If your loan amount is on the borderline between Jumbo & Conforming, consider paying more down payment to reduce the loan amount within Conforming limits. | |
| What is a Conventional Loan? | |
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A conventional loan is a long-term real estate purchase loan made by a commercial lender without any requirement set by governmental agencies like FHA or VA. | |
| What is a Blanket Mortgage? | |
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A blanket mortgage is a mortgage that covers multiple properties owned by the same owner. | |
| What is a Balloon Loan? | |
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A balloon loan is a loan in which the remaining principal balance becomes fully due and payable at a predetermined time. Most of the balloon loans have level payments until the note becomes due and payable in 5 or 7 years. | |
| What is a Balloon Payment? | |
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A balloon payment is the final payment, usually larger than regular payments, that pays off the remaining principal balance on a balloon loan. | |
| What are my options, if I do not want to pay the balloon payment? | |
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If you do not plan to pay the balloon payment that is coming up, you may think of refinancing or selling the property. You can also check to see if your balloon loan has any provision for an extension of the loan. Watch out for the higher interest rate that may be applicable on any extensions. | |
| What is Origination Fee or points? | |
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Loan origination fee or Points is the service fee charged by the lender on a loan. One point equals to 1% of the loan amount. It is usually paid at the closing of the transaction. It is usually not tax deductible. (Please confirm with your tax consultant). | |
| What are Discount Points? | |
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Discount points are additional closing costs paid to a lender in order to reduce the interest rate on a loan. One discount point is 1% of the loan amount. | |
| What is Warehouse Fee? | |
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Warehousing fee is a fee that may be charged by a lender to a borrower for the time period when the purchase money is "waiting" for a loan to close. | |
| What is Amortization? | |
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Amortization is the process by which you reduce the loan balance by making regular payments that sufficiently cover the interest and principle. | |
| What is Negative Amortization? | |
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Negative Amortization is an increase in principal balance which occurs over time when the monthly payments do not cover the interest due. The interest amount which is not covered by the payment is added to the unpaid principal balance. As a result, you see mortgage balance being increased over time, instead of being reduced. | |
| What is an Amortization Schedule? | |
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An amortization schedule is a table showing mortgage payments over the life of a loan along with corresponding amounts applied toward interest and principle. You will observe that in the beginning years after obtaining the loan, major portion of your payments is applied toward the interest and a minor portion is applied toward the principle. | |
| Who is a Mortgage Banker? | |
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A mortgage banker is an entity that lends money on real estate. Mortgage banker is also known as a non-institutional lender. Unlike a mortgage broker, a mortgage banker takes on the responsibility for all the steps involved in the lending process. A mortgage broker can also be mortgage banker. | |
| Who is a Mortgage Broker? | |
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A mortgage broker is an entity that assists a borrower get a loan from a selection of lenders. Unlike a mortgage banker, mortgage broker does not lend money and therefore is not responsible for all the steps involved in the lending process. Mortgage broker helps borrower shop for a loan, prepares a complete loan package, submits to the lender and follows up with the lender until loan approval. Mortgage brokers charge fees for their services. | |
| Who is a Loan Officer? | |
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A loan officer is a representative of a bank or a lending institution who is authorized to communicate and interact with the borrowers on behalf of the lending institution. | |
| Who is a Trustee? | |
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A trustee is a party who is given legal responsibility to hold a property in trust as a fiduciary for the benefit of another. | |
| What is an Interest? | |
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An interest is the fee charged by the lender for borrowing a sum of money for a specified amount of time. | |
| What is an Interest Rate? | |
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An interest rate is the percentage of the sum of money borrowed that is paid as the fee for borrowing the money for a specified amount of time. | |
| What is an Index? | |
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An index is a published benchmark interest rate that the lenders use to compute interest rate of an adjustable rate mortgage. The are three commonly used indexes, Eleventh District Cost of Funds Index, Index based on Treasury Bills and Index based on Certificate of Deposit. Usually the Margin is added onto Index to compute the adjustable interest rate. | |
| What is Margin? | |
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The number of percentage points the lender adds to the index rate to calculate the adjustable rate mortgage (ARM) interest rate at each adjustment date, subject to the limit for change in the interest rate. Unlike the Index of a loan, the margin does not fluctuate. The interest rate fluctuations in an adjustable rate mortgage is caused by the fluctuations in the index rate. | |
| What is Annual Percentage Rate (APR)? | |
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APR, Annual Percentage Rate, is a measure of the total cost of obtaining the loan (including pre-paid interest and loan fees) expressed as a yearly percentage rate. Because all lenders apply the same rules in calculating the annual percentage rate, it provides consumers with a good basis for comparing the cost of loans. | |
| What is Principal? | |
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In the context of a mortgage, principal is the amount of money that is borrowed or the outstanding amount of money that is to be paid off (principal balance). Additionally, the portion of the monthly payment that goes to reduce the outstanding mortgage balance is also referred to as principal. | |
| What is Principle Balance? | |
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Principle balance is the outstanding balance of original mortgage that is to be paid off. | |
| Why does the Principal Balance remain practically unchanged during the beginning years? | |
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In the beginning years after obtaining a mortgage, a higher portion of each monthly payment is applied to pay off the interest. Therefore the principal balance is not reduced substantially. But as time goes by, an increasingly higher portion of the monthly payment is applied toward the principal balance, thus reducing it at a higher pace. Keeping other factors constant, the more the principal balance is reduced, the more equity one has in a property. | |
| How can I find out what my Principal Balance is? | |
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If you already have a mortgage on a property, you can find the principal balance written on your monthly statement. You can also call your lender and find out how much is the principal balance. Make sure, you have loan number and other personal verification data handy for the phone call. If you would like to know how your monthly payments impact the principal balance, you can look that up on the Amortization Schedule). | |
| What is PITI? | |
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PITI is an abbreviation of the major components of a mortgage payment, namely, Principal, Interest, Taxes & Insurance. The "Principal" is the portion of the monthly payment that goes to reduce the outstanding mortgage balance. The "Interest" is the fee charged by the lender for borrowing a sum of money for a specified amount of time. The "Taxes" are the property taxes on the property and the "Insurance" is usually the mortgage & hazard insurance. The lender usually uses an estimated PITI payment for pre-qualifying borrowers. | |
| Why does the lender collect Taxes and Insurance each month? | |
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On many loans, the lender collects 1/12 of property taxes and 1/12 of hazard insurance as part of the monthly payment. The lender keeps the taxes and insurance portion into an escrow account to pay the taxes and insurance when they become due. This is done by the lender to make sure that the taxes and insurance are paid on time. | |
| What is Reconveyance? | |
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Reconveyance is the re-conveying of a property by the lender to the borrower upon repayment of the total mortgage. | |
| What is Loan term? | |
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Loan Term is the time period a borrower has for re-paying the mortgage. Most commonly used loan term is 30-year or 15-year. | |
| What is Collateral? | |
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Collateral is something that is valuable and offered as a security while obtaining a loan. In case of real estate, collateral is the property against which the buyer secures a loan. If the buyer defaults on the loan, the lender can sell the property to collect the loan. | |
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