Glossary of Terms

Agreement of Sale

This is a document that is signed by both a buyer and seller, and states the terms and conditions under which a property will be sold.

Amortization

This refers to the process of evaluating a loan’s value over a period of time. And an amortization calculator can help you estimate how much money you may pay over the life of your home loan for principal and interest.

Appraisal

An appraisal is an estimate of a property’s fair market value. It’s a document generally required (depending on the loan program) by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property. The appraisal is performed by an “Appraiser,” typically a state-licensed professional who is trained to render expert opinions concerning property values, its location, amenities and physical conditions.

APR

The annual percentage rate (also known as the APR) is the interest rate that reflects the cost of a mortgage at a yearly rate. Although it is likely higher than the stated or advertised rate on a mortgage, this is often because an APR includes other points and credit costs. You might also consider this to be closer to the “true cost of a loan,” since you may get a better sense of most of the costs included in your mortgage loan.

The APR does not affect your monthly payments. Your monthly payments are strictly a function of the interest rate and the length of the loan.

The following fees are generally included in the APR:

  • Points (both discount points and origination points)
  • Pre-paid interest (the interest paid from the date the loan closes to the end of the month)
  • Loan-processing fee
  • Underwriting fee
  • Document-preparation fee
  • Private mortgage-insurance
  • Escrow fee

The following fees are normally not included in the APR:

  • Title or abstract fee
  • Borrower Attorney fee
  • Home-inspection fees
  • Recording fee
  • Transfer taxes
  • Credit report
  • Appraisal fee

 

Cash Out Refinance

One alternative to taking out a home equity loan is a cash out refinance. During this type of refinance, borrowers extract home equity while refinancing their mortgage in a second mortgage loan.

Depreciation

The measurement of loss in value for a property, sometimes driven by property damage or poor economic factors.

Equity

Equity is the difference between what your home is worth and the remaining balance on a mortgage loan. When your home is worth more than the amount remaining on your mortgage loan, your home has equity that can be used in a second mortgage or a home equity line of credit. Some borrowers use this equity to finance major projects and investments, such as home improvements and expansions.

Lien

A form of collateral claimed by a mortgage lender on a property, which allows the lender to have conditional ownership of a home should a borrower fail to make payments. Liens on home loans go away after the borrower completes all payments owed on a property.

PMI

On a conventional mortgage, when your down payment is less than 20% of the purchase price of the home mortgage lenders usually require you get Private Mortgage Insurance (PMI) to protect them in case you default on your mortgage. Sometimes you may need to pay up to 1-year’s worth of PMI premiums at closing which can cost several hundred dollars. The best way to avoid this extra expense is to make a 20% down payment, or ask about other loan program options.

Principal

If you purchase a home by using a mortgage lender, the principal is the amount you borrowed on a home loan in order to purchase the property.

Title Insurance

Since homes are used as collateral for a mortgage loan, lenders want to make sure that the title of the property is clear of any past liens that could impact the mortgage. In order to ensure that a home is free and clear of these types of issues, lenders require that borrowers purchase title insurance on the property.

Underwriter

Mortgage lenders rely on underwriters to help them evaluate how risky a borrower may be. Underwriters usually look at a few key aspects before approving a borrower for a home loan, including the buyer’s credit history, employment or ability to make payments, and collateral.