Some common mortgage loan and finance terms are explained
Common terms used to describe a mortgage involve the “lender,” the “debtor,” and the “mortgagor.” The meaning of these terms may be self-explanatory, but there are also other mortgage-related terms that a homeowner may not be completely familiar with. We cover some of them here:
The lender is the financial institution, usually a bank, that provides the money in the form of a loan for the amount of the mortgage. The creditor is sometimes referred to as a mortgagee or lender.
The debtor is the person or party who owes the mortgage or loan. They can be called mortgage debtors.
Many houses are owned by more than one person, such as a husband and wife, or sometimes two close friends will buy a house together, or a child with his parents, etc. If this is the case, both people become debtors of this loan, and not just owners of the property.
In other words, be careful that your name appears on the deed or title to any home, as this also makes you legally responsible for the mortgage or loan attached to that home.
Mortgage broker, financial advisor
Mortgages are not always easy to come by, but due to the demand for housing in most countries, there are many financial institutions that offer them. Banks, credit unions, savings and loans, and other types of institutions can offer mortgages. The prospective borrower can use a mortgage broker to find the best mortgage with the lowest interest rate for them; the mortgage broker also acts as the lender’s agent to find people willing to take on these mortgages, handle the paperwork, etc.
There are usually other parties involved in closing or obtaining a mortgage, from attorneys to financial advisors. Since a home mortgage is usually the largest debt a person will have in their lifetime, they often seek any legal and financial advice available to make the right decision. A financial advisor is someone who can become very familiar with your particular needs, income, long-term goals, etc., and then give you the best advice on what your borrowing needs might be.
When the debtor cannot or does not fulfill the financial obligations of the mortgage, the adjudication of the property can be executed, that is, the creditor seizes the property to recover the remaining cost of the loan.
Typically, a home that is in foreclosure will be sold at auction and that sale price will be applied to the outstanding amount of the mortgage; the debtor may still be liable for the remaining amount if the property sells for less than the outstanding mortgage balance.
For example, let’s say a person still owes $50,000 on their mortgage and their home is in foreclosure. At auction, the house sells for just $45,000. The debtor is still responsible for that remaining $5,000 difference.
Most banks and financial institutions will try to avoid foreclosing on any of their debtor’s property if possible. Not only do they run the risk of not being able to sell the home at auction at any price, but there are additional costs and risks that occur when the home is vacated by the previous owners. This includes vandalism, squatting (people who enter vacant lots or vacant homes and remain there until they are forcibly removed), city fines for untidy yards, etc.
Annual Percentage Rate (APR)
The APR should not be confused with the interest rate of a mortgage.
The APR is the interest rate on a loan plus the added costs of obtaining the loan, such as points, origination fees and mortgage insurance premiums (if applicable).
If there were no cost to get a loan other than the interest rate, the APR would be equal to the interest rate.
The break-even point is the time it will take to recoup the costs incurred to refinance a mortgage. It is calculated by dividing the amount of the refinance closing costs by the difference between the old and the new monthly payment.
For example, if it costs you $5,000 in fees, penalties, etc. to refinance your mortgage, but you save $300 a month on your payments with your new mortgage, the break-even point is after 17 months (17 months x $300 per month = $5,100).
This refers to an adjustable rate mortgage; a mortgage that allows the lender to adjust its interest rate periodically.
Fixed rate mortgage
A mortgage in which the interest rate does not change during the term of the loan.
ARMs have fluctuating interest rates, but those fluctuations are usually limited by law to a certain amount.
These limitations can apply to how much the loan can be adjusted over a six-month period, an annual period and over the life of the loan, and are called “caps”.
A number used to calculate the interest rate on an ARM. The index is usually a published number or percentage, such as the average interest rate or yield on US Treasuries. A margin is added to the index to determine the interest rate that will be charged on the ARM.
Since the index can vary with ARMs, many people considering refinancing do well to stay aware of the standard interest rate set by the federal government, as it is typically used by lending institutions to calculate this index.
The interest rate banks charge their preferred customers. Changes in the prime rate influence changes in other rates, including mortgage interest rates.
An owner’s financial interest or the value of a property. Equity is the difference between the property’s fair market value and the amount still owed on its mortgage and other liens, if that value is higher.
In other words, if the home’s fair market value is $200,000 and your mortgage (and other liens, if applicable) is only $150,000, then the home has $50,000 in equity.
Asset value loan
Loans secured by a specific property that were made against the “equity” of the property after it was purchased.
Using the above illustration of a home that has $50,000 in equity, a homeowner can take out a loan up to that amount, using the home as collateral for that loan. A lender knows that if the owner defaults on the loan, they can seize the property and sell it for at least that amount, recouping the loan amount.
The gradual repayment of a mortgage loan, usually by monthly installments of principal and interest.
An amortization table shows the payment amount broken down by interest, principal and unpaid balance over the entire term of the loan. These tables are useful because when you make a mortgage payment, the same amount is not applied to the principal and interest month after month, even when the payment amount is the same. It’s often a difficult concept for those not in the real estate or banking business to understand, so an amortization table that explains how each payment is applied to the debt over the life of the loan can be very helpful.
When a borrower refinances their mortgage for an amount higher than the current loan balance with the intention of taking money out for personal use, it’s called a “pay-down refinance.” In other words, the mortgage is not just for the home itself, but an additional amount of money is also being financed.
An opinion of the fair market value of a property, based on an appraiser’s knowledge, experience and analysis of the property. The appraised value of the home is a key factor when mortgaging the home.
The increase in the value of a property due to changes in market conditions, inflation or other causes.
A decrease in property value; the opposite of appreciation.
Appreciation and depreciation are important concepts to remember; as we just mentioned, the appraised value of the home is a determining factor in the home mortgage. When refinancing, it’s important to understand that your home may have appreciated or depreciated in value since the original or first mortgage was obtained.
An agreement in which the lender guarantees a specified interest rate for a specified period of time at a specified cost.
The period of time during which the lender has guaranteed an interest rate to the borrower.
This is a different concept than a fixed rate mortgage, as the lock-in period of a mortgage can be temporary rather than for the life of the loan.
As we said above, many of these terms may already be familiar to you, but it doesn’t hurt to review them and see how they all relate to your mortgage and the refinancing process.
So now that you have these basic terms in mind when it comes to a mortgage and the loan process, let’s talk about the refinancing process in more detail.
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