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The Rosetta Stone of Home Loan Terms

By: Hal James.. When visiting a foreign, exotic location, you always try to learn at least the basic terms of the country. Well, one could argue that the mortgage industry is definitely a foreign world. Before visiting, you should have an understanding of the following terms.

Amortization occurs with every loan, but is a misunderstood concept. It simply refers to the repayment of the loan on a schedule. The schedule is typically monthly payments over a term of years.

The annual percentage rate is often thought of as just the interest rate on a loan. This is incorrect. It is really a calculation taking into account the interest rate, points, cost of mortgage insurance and other fees associated with the loan.

As a buyer, you are going to be asked to put down an earnest money deposit. This essentially tells the seller you are serious about the purchase. The deposit then becomes part of the down payment when closing occurs. Make sure to notify the lender of the amount.

The mortgage application is pretty much what it sounds like. It should be viewed, however, as only the first step in the process. You can expect the lender to ask for additional information and documentation.

If you get into trouble trying to pay your mortgage, it is important to understand a lender does not want to foreclose. If you communicate with them, they will often give you a special forbearance that lowers or eliminates payments for a period of months.

There are a number of quasi-government lenders. Fannie-Mae is one. It does not lend to the public directly, but guarantees loans made by lenders to certain types of lenders, often first time buyers or low-income borrowers.

Lenders evaluate potential borrowers in many different ways. The loan-to-value ratio is one of them. It is the requested loan amount divided by the appraised value of the property.

Timing is a big issue in the world of mortgages. Specifically, rates change on a daily basis. To avoid this problem, you want to “lock in” your interest rate when a lender approves you. The cost is usually a few hundred dollars.

Private mortgage insurance is an annoying aspect of buying a home. It protects lenders from some of the losses that can happen if a borrower defaults, but the borrower is required to pay for it! Put more than 20 percent down and you can avoid it.

Visiting a country where you don’t understand a word being said can make you feel bashful and intimidated. The same goes with dealing with lenders. This can lead to unfavorable loans. Take the time to learn the lingo, and you can avoid such problems.