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Email: neal.smith@pcmloan.com

A few times a month, we send out useful articles and information to our clients and business partners. We would love to include you!

Glossary of Real Estate Terms

Adjustable Rate Mortgage (ARM)
A mortgage in which the interest rate is adjusted periodically based on a pre-selected index. Also referred to as the renegotiable rate mortgage.

Amortization

Means of loan payment by equal periodic payments calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance.

 Annual Percentage Rate (APR)

An interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage, because it takes into account points and other credit costs. The APR allows home buyers to compare different types of mortgages based on the annual cost for each loan, however all lenders do not calculate APR the same way.

 Broker

An individual in the business of assisting in arranging funding or negotiating contracts for a client, but who does not loan the money himself. Brokers usually charge a fee or receive a commission for their services.

 Buydown

When the lender and/or the home guilder subsidizes the mortgage by lowering the interest rate during the first few years of the loan. While the payments are initially low, they will increase when the subsidy expires.

 Cash Reserves

The funds a borrower has remaining after their loan funds. The normal requirement could be monies equal to 2 months of the mortgage payment. The amount of Cash Reserves varies by loan program, but larger reserves are a strong compensating factor.

 Construction Loan

A short-term interim loan for financing the cost of construction. The lender advances funds to the builder at periodic intervals as the work progresses.

 Debt Income Ratio

Your total monthly housing expense divided by your gross monthly income (before taxes). The Debt Ratio is your total monthly housing expense PLUS any recurring debts (i.e. monthly credit card minimum payment, car payments, or other loan payments) divided by your income. Standard underwriting suggests a maximum guideline of 28% on the Income Ratio and 36% on the Debt Ratio, but these ratios can vary based on the loan program, the financial strength of the borrower and the down payment.

 Discount Points

Prepaid interest assessed at closing by the lender. Each point is equal to one percent of the loan amount. (e.g. two points on a $100,000 mortgage would cost $2,000.)

Earnest Money

Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.

 FHA Loan

A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans, they are generous enough to handle moderately priced homes almost anywhere in the country.

 FHA Mortgage Insurance

Requires a small fee (up to 3% of the loan amount) paid at closing or a portion of the fee added to each monthly payment of an FHA loan to insure the loan with FHA. On a 9.5% $75,000 fixed-rate FHA loan, this fee would amount to either $2,250 at closing, or an extra $31 per month for the life of the loan. In addition, FHA mortgage insurance requires an annual fee of 0.5% of the current loan amount in the years the fee must be paid.

Impound/Escrow

That portion of a borrower’s monthly payments held by the lender to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as reserves.

 Index

A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one-year, three-year, and five-year US Treasury Security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average Costs-of-Funds incurred by savings and loans) which is then used to adjust the interest rate on an adjustable mortgage up or down.

 Loan to Value

Cash Reserves are the funds a borrower has remaining after their loan funds. The normal requirement could be monies equal to 2 months of the mortgage payment. The amount of Cash Reserves varies by loan program, but larger reserves are a strong compensating factor.

 Margin

The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.

 Mortgage Insurance

Money paid to insure the mortgage when the down payment is less than 20%. See Private Mortgage Insurance or FHA Mortgage Insurance.

 Negative Amortization

Negative amortization occurs when the monthly payments are not large enough to pay all of the unpaid balance of the loan, therefore increasing the loan balance and going in a “negative” direction. In this particular scenario, a borrower can literally end up owing more money than they originally borrowed. The reason that this occurs is because on a negatively amortized loan, the borrower is given several different payment options.

  • · OPTION 1: To pay what is known as the fully indexed payment. This is the margin plus index on the adjustable. This payment, which is typically the highest of the options, will prevent you from going negative.
  • · OPTION 2: An interest only payment. You would not be going negative by making this payment either, but you would not be decreasing the principal balance that you owe on your loan. This is because you are paying only the interest portion and no additional principal to your loan.
  • · OPTION 3: (And the one that most often gets people into trouble…) the negatively amortized payment. This is a payment that not only does not cover the principal, but doesn’t cover all of the interest owed on the monthly payment, therefore accruing negative equity as a result.

 Origination Fee

The fee charged by a lender to prepare loan documents, make credit checks, inspect and sometimes appraise a property; usually computed as a percentage of face value of the loan.

 PITI
Principal, interest, taxes and insurance. Also called monthly housing expense.

Piggy Back Loan: 80/10/10,  80/15/5
”Piggy Back Loan” is a slang term, which really is another way of describing a 1st and 2nd Trust Deed that are closed concurrently at the close of escrow. This combination of a 1st and 2nd Trust Deed can be effectively utilized to avoid the need to pay private mortgage insurance. The borrower may apply for a loan at 90% with the same 10% down payment. A 1st Trust Deed at 80% and a 2nd Trust Deed at 10% could be procured concurrently. The interest rate on the 2nd Trust Deed is typically higher, often a double-digit figure. However, the fact that the interest can be deducted on the 2nd Trust Deed often makes this a prudent financial option for the borrower. The net result is often cheaper than borrowing 90% of the financing as one loan and incurring a private mortgage insurance payment. See Private Mortgage Insurance.

Pre-payment Penalty

Money charged for an early repayment of debt. Some loans require pre-payment penalties and sometimes it’s an option. We recommend soft prepay when available versus a hard prepay. Soft prepay is when you are able to sell your home within the prepayment period with no penalty.

 Private Mortgage Insurance (PMI)

In the event that you do not have a 20% down payment, the lender will allow a smaller down payment, sometimes as low as 3%. However, with a smaller down payment, borrowers are usually required to carry private mortgage insurance on the loan. Private mortgage insurance will require an initial premium payment of 1% to 5% of your mortgage amount and may require an additional monthly fee, depending on your loan structure. On a $75,000 home with a 10% down payment, this would mean either an initial premium payment of $2,025 to $3,375, or an initial premium of $675 to $1,130 combined with a monthly payment of $25 to $30.

 Title Insurance

A policy usually issued by a title insurance company, which insures a home buyer against errors in the title search. The cost of the policy is usually a function of the value of the property, and is often borne by the purchaser and/or seller.

 Underwriting

The decision whether to provide funding to a potential home buyer, based on credit, employment, assets, and other factors, while matching this risk to an appropriate rate and term or loan amount.