Adjustable-rate loans, also
known as variable-rate loans, usually offer a lower
initial interest rate than fixed-rate loans. The
interest rate fluctuates over the life of the loan
based on market conditions, but the loan agreement
generally sets maximum and minimum rates. When interest
rates rise, generally so do your loan payments;
and when interest rates fall, your monthly payments
may be lowered.
Annual percentage rate (APR) is
the cost of credit expressed as a yearly rate. The
APR includes the interest rate, points, broker fees,
and certain other credit charges that the borrower
is required to pay.
Conventional loans are mortgage
loans other than those insured or guaranteed by
a government agency such as the FHA (Federal Housing
Administration), the VA (Veterans Administration),
or the Rural Development Services (formerly know
as Farmers Home Administration, or FmHA).
Escrow is the holding of money
or documents by a neutral third party prior to closing.
It can also be an account held by the lender (or
servicer) into which a homeowner pays money for
taxes and insurance.
Fixed-rate loans generally have
repayment terms of 15, 20, or 30 years. Both the
interest rate and the monthly payments (for principal
and interest) stay the same during the life of the
loan.
The interest rate is the cost
of borrowing money expressed as a percentage rate.
Interest rates can change because of market conditions.
Loan origination fees are fees
charged by the lender for processing the loan and
are often expressed as a percentage of the loan
amount.
Lock-in refers to a written agreement
guaranteeing a home buyer a specific interest rate
on a home loan provided that the loan is closed
within a certain period of time, such as 60 or 90
days. Often the agreement also specifies the number
of points to be paid at closing.
A mortgage is a document signed
by a borrower when a home loan is made that gives
the lender a right to take possession of the property
if the borrower fails to pay off the loan.
Overages are the difference between
the lowest available price and any higher price
that the home buyer agrees to pay for the loan.
Loan officers and brokers are often allowed to keep
some or all of this difference as extra compensation.
Points are fees paid to the lender
for the loan. One point equals 1 percent of the
loan amount. Points are usually paid in cash at
closing. In some cases, the money needed to pay
points can be borrowed, but doing so will increase
the loan amount and the total costs.
Private mortgage insurance (PMI)
protects the lender against a loss if a borrower
defaults on the loan. It is usually required for
loans in which the down payment is less than 20
percent of the sales price or, in a refinancing,
when the amount financed is greater than 80 percent
of the appraised value.
Thrift institution is a general
term for savings banks and savings and loan associations.
Transaction, settlement, or closing costs
may include application fees; title examination,
abstract of title, title insurance, and property
survey fees; fees for preparing deeds, mortgages,
and settlement documents; attorneys’ fees;
recording fees; and notary, appraisal, and credit
report fees. Under the Real Estate Settlement Procedures
Act, the borrower receives a good faith estimate
of closing costs at the time of application or within
three days of application. The good faith estimate
lists each expected cost either as an amount or
a range.
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