By Marcie Geffner
Much of the most complicated jargon in a real estate transaction involves the buyer's mortgage to purchase the home. Mortgage terminology is technical, specific and widely misunderstood. If you're preparing to borrow a large sum of money, be certain that you completely understand exactly how your loan works and what the terms and conditions are. Don't let anyone rush you and ask as many questions as you need. To clarify some of the basics, here are eight mortgage-related terms and their definitions:
1. Down payment
A percentage of the home purchase price that the buyer pays in cash, instead of financing with borrowed money.
2. Mortgage insurance
Insurance that protects the lender from financial loss if the homeowner defaults on the mortgage. MI usually is required if the downpayment is less than 20 percent of the purchase price of the home. Premiums are paid monthly by the borrower even though the insurance protects the lender. Mortgage insurance is available from private-sector companies and governmental agencies.
3. Credit report
A summary of a person's track-record of repaying borrowed money, including credit cards, department store cards, mortgages, car and boat loans, personal credit lines, home equity loans and so on. A credit score is a numerical representation of a person's credit-worthiness. A credit report doesn't include personal lifestyle or medical information.
Adjustable-rate mortgage. Rather than having a fixed rate of interest for a 15- or 30-year term, an adjustable-rate mortgage has a fluctuating interest rate. Hybrid mortgages may be a combination of a fixed rate and an adjustable rate or have an initial fixed rate followed by an adjustment after five, seven or 10 years. ARMs and hybrids are more popular at times when interest rates are higher.
5. Negative amortization
If the interest rate on an ARM increases, the monthly payments may or may not be increased to cover the additional interest owed. If the payments aren't adjusted along with the interest rate, the unpaid interest is added to the loan balance. The borrower may owe more money as time passes even if he or she makes the loan payments on time. In such a case, the payments may not be adequate to pay off the loan in full by the end of the loan term.
6. Prequalification letter
A nonbinding letter from a lender stating that a home buyer meets the basic income and credit requirements to obtain a mortgage of a specified amount. A preapproval letter means the buyer's documentation has been verified and the loan is subject only to an appraisal of the property.
7. Lender's escrow or impound account
An additional sum of money paid monthly by the borrower and set aside by the lender to pay the borrower's hazard insurance premiums and property taxes. An impound account may be required on some mortgages.
Principal, interest, taxes and insurance. The sum of the principal and interest due on the buyer's mortgage, plus the property taxes and hazards insurance premiums for the property. PITI is usually stated as a monthly amount.
Copyright Marcie Geffner. All rights reserved. No part of this article may be used or reproduced in any manner whatsoever without written permission of the author.