By Ali Sahabi of Optimum Group, LLC
President, Building Industry Association (BIA) Baldy View Chapter
For many of us, wrapping up the holiday season will mean preparing for home shopping next year. So if attaining the American Dream of Homeownership is on your 2018 calendar, you will require a concise understanding of the terms you will have to know to successfully navigate the mortgage process. To assist you in your journey, here courtesy of the National Association of Home Builders (NAHB) is a handy reference list of the most important mortgage banking terms for when you begin shopping for the mortgage that will open the doors to your new home.
Adjustable Rate Mortgage (ARM) - A loan whose interest rate is adjusted according to movements in the financial market.
Amortization - A payment plan by which a borrower reduces a debt gradually through monthly payments of principal and interest.
Annual Percentage Rate (APR) - The annual cost of credit over the life of a loan, including interest, service charges, points, loan fees, mortgage insurance, and other items.
Assumption - A transaction allowing the buyer of a home to assume responsibility for an existing loan on the home instead of getting a new loan.
Cap - A limit to the amount an interest rate or a monthly payment can increase for an adjustable rate loan either during an adjustment period or over the life of the loan.
Conditions, Covenants, and Restrictions (CC and Rs) - The standards that define how a property may be used and the protections the developer has made for the benefit of all owners in a subdivision.
Conventional Loan - A mortgage loan not insured by a government agency such as FHA or VA.
Convertibility - The ability to change a loan from an adjustable rate schedule to a fixed rate schedule.
Equity - The difference between the value of a home and what is owed on it.
Escrow - The handling of funds or documents by a third party on behalf of the buyer and/or seller.
Fixed Schedule Mortgage - A mortgage whose payment schedule for the life of the loan is established at closing.
Graduated Payment Mortgage (GPM) - A fixed-rate, fixed-schedule loan which starts with lower payments than a level payment loan; the payments rise annually over the first 5 to ten years and then remain constant for the remainder of the loan - GPMs involve negative amortization.
Growing Equity Mortgage (Rapid Payoff Mortgage) - A fixed -rate, fixed -schedule loan which starts with the same payments as a level payment loan; the payments rise annually, with the entire increase being used to reduce the outstanding balance - No negative amortization occurs, and the increase in payments may enable the borrower to pay off a 30 -year loan in 15 to 20 years, or less.
Mortgage Commitment - A formal written communication by a lender, agreeing to make a mortgage loan on a specific property, specifying the loan amount, length of time and conditions.
Mortgage Origination Fee - A charge by a lender for the work involved in preparing and servicing a mortgage application (usually 1 percent of the loan amount).
Negative Amortization - An increase in the outstanding balance of a loan when a monthly payment is not large enough to cover all of the interest due.
PITI - Principal, interest, taxes, and insurance which are the four major components of monthly housing payments).
Point - A charge of one percent of the mortgage amount - Points are a one -time charge assessed by the lender at closing to increase the interest yield on a mortgage loan.
Real Estate Settlement Procedures Act (RESPA) - A federal law requiring lenders to provide home buyers with information about known or estimated settlement costs - The act also regulates other aspects of settlement procedures.
Settlement or Closing - A meeting to sign documents which transfer property from a seller to a buyer. Closing costs are charges paid at settlement for obtaining a mortgage loan and transferring real estate title.
Keep these terms with you when you start shopping for a home loan and it will save you time and energy while putting you closer to the best possible mortgage – and home – you can get.
Have a happy and safe holiday season!