Glossary of Terms

Mortgage Loan

The mortgage amount is the amount of money you borrow from a lender to pay for your house.

The mortgage is a legal document that secures the note and gives the lender a legal claim against your house if you default on the note's terms. In effect, you have possession of the property, but the lender has an ownership interest (called an "encumbrance") until the loan has been fully repaid. The lender agrees to hold the title or deed to your property (or in some states, to hold a lien on your title or deed) until you have paid back your loan plus interest.

Online Mortgage Auction™

This amazing patent pending concept has been pioneered by NameYourLoan.com and it combines the effectiveness of free markets, lender competition and auctions, together with the power of the internet to deliver unmatched results when shopping for a loan.  In a nutshell, NameYourLoan.com® brings all the major Banks and Lenders together in one place, where they compete in an online auction for a chance to win the borrower’s business.  Simply put, Borrowers name the type of loan they want & Lenders jump at the opportunity to win their business by bidding lower and lower.  The difference between NameYourLoan.com’s Online Mortgage Auction™ and other mortgage referral services who claim “lender competition” is that they simply sell the borrower’s information as sales leads to any lender who pays them top dollar regardless of the lender’s competitiveness; but at NameYourLoan.com, lenders must first compete with one another and only those lenders who make the final lowest offers get a chance to win the borrower’s contact information and possibly their business.      

Mortgage amount and term

The mortgage amount is the amount of money you borrow from a lender to pay for your house. The term is the number of years over which you can pay back the amount you borrow. The length of your mortgage repayment period will directly affect your monthly mortgage payments. For the same mortgage principal amount, you will find that the shorter your repayment period is, the higher your monthly payments will be, but the total interest you pay over the life of the loan will be less. On the other hand, the longer your repayment period is, the lower your monthly payments will be, but the total interest you pay over the life of the loan will be more. The most popular mortgage term is 30 years. By extending payment over 30 years, you keep your monthly housing costs low. If you can afford higher monthly payments, you can select a mortgage term that is shorter: there are 20-year, 15-year, and even 10-year fixed-rate mortgages available from most mortgage lenders.

Amortization

During the term of your loan, you will pay back your mortgage by making regular monthly payments of principal and interest. In the early years of your loan, most of the money you pay will be for the interest you owe. Toward the end of the term of your loan, you will be paying primarily principal. This type of repayment method is called amortization.

Negative Amortization

With all adjustable loans, monthly payment increases are usually limited. With “Negative Amortization” adjustable loans, it is possible for interest rates to rise enough so that regular monthly payments do not cover monthly interest costs that are due to the lender. For example, the scheduled monthly payment on the loan is $500 but the monthly interest cost is $525.  In this case, the unpaid interest of $25 is added to the principal balance of the loan.  Increasing the size of the loan balance is called "Negative Amortization.”

Negative amortization can generally be offset by increasing monthly payments.  Also, loan papers typically limit the amount of negative amortization to 125 percent of the original loan amount.

One of the advantages of a Negative Amortizationloan is that it usually offers a lower and more affordable monthly payment, but at the expense of an increasing loan balance.

Consult your lender for specific details.

Fixed interest rate

Some mortgages have an interest rate that is fixed for the entire term of the loan. One advantage of a fixed-rate loan is that you know your interest rate will never change over the term of your loan.

Adjustable interest rate

An adjustable-rate mortgage (called an ARM) has an interest rate that varies during the life of the loan. The interest rate with an ARM may increase or decrease based on market interest rates. Consequently, your mortgage payments may go up or down.

Down payment

The down payment is the part of the purchase price that the buyer pays in cash and does not finance with a mortgage. The larger your down payment, the less you will need to borrow. The less you need to borrow, the smaller your mortgage payments will be. Lenders often view mortgages with larger down payments as more secure because you have more of your own money invested in the property. However, you may have as little as 3 percent to 5 percent of the purchase price for a down payment. Lower down payments help many people afford homes of their own sooner.

Closing costs

The closing, also known in some areas as the settlement, is the final step -- the act of transferring ownership of the home to you. The closing usually takes place at a financial institution, like a bank or savings and loan, and is designed to ensure that the property is all set to be transferred to you. Each state has its own rules as to what costs must be paid at the closing. Common items to be paid at the closing are: transfer taxes and recordation taxes, title insurance, the site survey fee, loan discount points, attorney fees, and various fees for preparing the legal documents. When talking about closing costs, rather than discussing all of these fees individually, closing costs are talked about as a percentage of the sales price or the loan amount. Although you can try to get the seller to pay some part of the fees, closing costs generally range from 3 percent to 6 percent of the sale price of your home.

Discount points

Points (also called “discount points”) are a type of fee that you pay to your lender. Simply put, a point is equal to 1 percent of the loan amount. One point on a $100,000 loan is $1,000; on a $200,000 loan, it is $2,000. Discount points represent extra money you can pay to the lender at closing in exchange for a lower interest rate on your loan. For each point you pay for a 30-year loan, your interest rate is generally reduced by about 1/8th (or .125) of a percentage point. So, if the current interest rate on a 30-year mortgage is 8.5 percent, paying 1 point means you could get that mortgage for an interest rate of 8.375 percent. For example, you are shopping for a 30-year mortgage loan. A lender quotes you an interest rate for a 30-year, $100,000 mortgage at 8.5 percent. You can choose not to pay any discount points at closing and pay 8.5 percent interest. If you are more interested in paying less interest, you can ask the lender to quote you interest rates with your paying 1, 2, or 3 discount points. Usually, the longer you plan to stay in your home, the more sense it makes to pay discount points.

Conforming and nonconforming loans

The term “conforming,” as opposed to “nonconforming,” is sometimes used to explain loans that offer terms and conditions that follow the guidelines set forth by Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are two private, secondary mortgage market companies that buy mortgage loans from lenders, thereby ensuring that mortgage funds are available at all times in all locations around the country. The most important difference between a loan that conforms to Fannie Mae/Freddie Mac guidelines and one that doesn't is its loan limit. Fannie Mae and Freddie Mac will purchase loans only up to a certain loan limit. So, if your loan amount will be for more than the conforming loan limit, you may be asked to pay a higher interest rate on your mortgage. Your mortgage loan may also follow slightly different underwriting requirements, particularly in regard to your required down payment amount. Check with your lender about this if you are taking out a large loan amount. Nonconforming loans are sometimes called jumbo loans.

Annual Percentage Rate (APR)

In comparing any type of loan, whether it is a fixed rate loan to a fixed rate loan, adjustable rate loan to adjustable rate loan or fixed rate loan to adjustable rate loan, there is one way that can be used to compare apples to apples and even apples to oranges.

APRs are designed to do just that. APRs are a way to calculate the annual cost of loans, taking into consideration loan origination fees (points) and the other costs associated with securing a loan. The additional costs include appraisal and credit report fees as well as processing and document fees.

One confusing aspect of APRs is that the APR on 15 year loans will carry a higher relative rate due to the fact that the points are amortized over the 15 year term rather than the 30 year term. When a Regulation Z (Reg Z, the mortgage companies’ disclosure of cost for the loan) is prepared for a buyer/borrower the prepaid interest is also included in the APR calculation. For our illustrations we will use only the points, appraisal, credit report, processing and document fees.

As a means of protecting consumers from companies who did not disclose the fees associated with a particularly low start rate on an adjustable rate loan or below market rate on a fixed rate loan, APRs give consumers a way to check the true cost of a loan.

One common situation that occurs when a borrower receives a Reg Z, and a copy of their note, is the column that indicates the amount financed is less than the loan amount the borrower is actually financing. It is here that many borrowers leap before they look and call to find out why they are only receiving a $146,925 loan when they applied for a $150,000 loan. It is here that APRs enter the picture.

Let's look at how APRs are calculated. For our illustration we will assume a 8.50% fixed rate interest. For a 30 year loan the monthly payments for a $150,000 loan are $1,153.37.

In order to calculate the APR for this loan we subtract $2,250.00 (1.50 points), $275.00 appraisal fee, $50.00 credit report fee, $500.00 processing, document and other fees. ($150,000 - $3,0750 = $146,925). The $146,925 is then used as the present value/loan amount to determine the true cost of this loan. By solving for the new interest rate for a $146,925 loan with the same payment of $1,153.37, the APR is calculated as 8.73%.

How does this compare to a 30 year fixed rate loan with an 8.00% interest rate and 3.50 points? The monthly payment for this loan is $1,100.65.

In order to calculate the APR for this loan we subtract $5,255.00 (3.50 points), $275.00 appraisal fee, $50.00 credit report fee, $500.00 processing, document and other fees. ($150,000 - $6,075 = $143,925). The $143,925 is then used as the present value/loan amount to determine the true cost of this loan. By solving for the new interest rate for a $143,925 loan with the payment of $1,100.65 the APR is calculated as 8.44%.

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