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20 Mortgage Terms You Should Know

Before you visit a lending institution, it is important to brush up on your banking lingo. Applying for a mortgage is easier when you understand the following terms.

1. Amortization: Refers to the paying off of debt over time. It may also take into consideration the depreciation in value of an asset over time.

2. ARM: Acronym for adjustable rate mortgage. Refers to a mortgage whose interest rate is either raised or lowered at regular intervals. May also be called a variable-rate mortgage.

3. Assumed Mortgage: Occurs when a buyer of a real property assumes the mortgage terms and obligations of the seller of the real property. Most often used when the buyer will not receive an interest rate as low as the rate on the seller's mortgage.

4. Borrower: Refers to the party taking out a loan.

5. Collateral: Refers to any asset that is promised if one cannot satisfy a loan agreement.

6. Down payment: Refers to the initial upfront payment portion for a loan. Some loans require down payments, while others do not. By requiring a down payment, a lender increases its chances of recovering the full amount if the borrower defaults on payments.

7. Encumbrance: Refers to anything that limits a property's title. Popular encumbrances include: mortgages, leases, easements, liens, deed restrictions, or building orders.

8. Equity: Refers to the difference between market price of a property and any remaining liability- such as the amount owed on a loan.

9. FHA: Acronym for the Federal Housing Administration. The government agency set to improve housing standards and conditions and stabilize the market. The FHA also provides financing.

10. FHA Loan: A loan issued through the FHA. Applicants must meet criteria concerning employment history, credit scores and income. Types of loans the FHA offers include: adjustable rate mortgages, fixed rate mortgages, energy efficient mortgages, graduated payment mortgages and growing equity mortgages.

11. Foreclosure: Refers to the legal process during which a lender repossesses a piece of real property after a borrower defaults in repayment. The lender can then re-sell the property.

12. HUD: Acronym for the Department of Housing and Urban Development. This Cabinet department was established under Lyndon B. Johnson's term as President of the United States. HUD enables low-income families to secure housing.

13. Principal: An agreed upon sum to be paid over a fixed period of time, to be repaid by a certain date. In some cases, the interest on the principal sum will also have to be paid by that date.

14. Interest Rate: Percentage of the principal that is paid as a fee (interest), over a certain period of time.

15. Lender: An institution that provides an amount of money to the borrower. Usually, this service is
provided at a cost, often referred to as interest.

16. Mortgage: Is a loan that allows home buyers or builders to secure financing.

17. PMI: Acronym of Private Mortgage Insurance. When a borrower's down payment is less than 20% of the sale price, the borrower must obtain private mortgage insurance through the lender. This protects the lender from loan default.

18. Property Law: The area of law that governs various forms of ownership in property (land/real estate and personal within the common law legal system). There is a division between movable property (personal) and immovable property (land/real estate) within the civil law system.

19. Underwriting: Refers to the process that a financial service provider uses to assess the eligibility of a customer to receive products like insurance, mortgage, or credit.

20. 80-10-10. Refers to a program involving two loans with a 10% down payment. The 90% loan is financed through a primary mortgage that is 80% of the sale price, and a second mortgage covers the remaining 10% of the sale price. While the secondary loan carries a higher interest rate, it is only for a small portion of the total loan. Therefore, monthly payments of the two mortgages are less than if paying one mortgage and PMI.

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