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Home Buying Guide

Terms and Definitions...

The right of the lender (mortgagee) to demand immediate repayment of the mortgage loan balance upon default of the borrower (mortgagor).

Adjustable Rate Mortgage
Where the rate can change at specific intervals as stated by the note. The payment is subject to change throughout the term of the loan.

A periodic reduction of a mortgage by making specific payments over a stated period of time.

An estimate of value on a piece of real estate by an appraiser who is considered to be an expert in real estate property evaluations. The appraisal usually determines how much money the lender will loan on that property.

The act of taking over a mortgage obligation incurred by the original borrower. The new owner assumes the mortgage obligations and assumes title to the property.
Balloon Payment
A mortgage obligation which has a balance due and payable at the end of the mortgage term which is greater than one installment payment. The final balloon payment wipes out the amount owed.

Basis Point
Lenders use basis points to measure interest rates in yield calculations. One basis point equals 1/100th of 1% in interest. 100 basis points equals 1% interest.

An artificial subsidy paid to provide a lower mortgage interest rate.

Bridge Loan
A temporary mortgage loan to help a borrower obtain the necessary cash funds to purchase another home prior to the sale of their currently owned home.
Cash Flow
The amount of cash derived over a certain period of time from an income producing property such as a rental house. Theoretically, the cash flow should be large enough to pay all property expenses including mortgage payments, maintenance, taxes, etc.

Certificate of Eligibility
The document given to qualified veterans which entitles them to VA guaranteed loans for homes and businesses. This certificate may be obtained by sending the veteran's separation papers (DD-214) to the local VA office with a request form (VA 1880) completed by the veteran.

The act of concluding the sale of real estate by exchange of a deed in return for other considerations. The signing of legal documents is necessary to convey the property.

A promise by a lender to make a loan with specific terms or conditions to a borrower. Also a promise by an investor to purchase mortgages from a lender with specific terms or conditions.

Commitment Fee
An up-front charge paid to bind an agreement to lend an amount of money at a specific interest rate.

Conventional Loan
A mortgage loan made by an institutional lender without government guarantees such as VA or FHA loans.

Conversion Option
The conversion of an adjustable rate mortgage into a fixed rate mortgage. Generally, the borrower must hold the adjustable rate mortgage for a specified amount of time. A fee is usually charged for this conversion.

Current Index
The current value of a recognized index as calculated and published nationally or regionally. The current index changes periodically and is used in calculating the new note rate at each adjustment period.
Debt Ratio
An allowable percentage of monthly gross income which includes the proposed mortgage payment and any recurring debt.

The failure of a duty or obligation, such as the failure to make the required payments called for in a mortgage note. Loan default may cause foreclosure.

Discount Buydown
The paying of discount points to reduce the interest rate temporarily or permanently for a home purchaser.

Discount Points
A device used to equalize interest rate yields for lenders and investors. Each discount point is equal to one percent of the loan amount. Each discount point paid on a 30 year fixed rate mortgage increases the lender's yield by approximately one fifth of a percent in interest.
The value a property owner has in real estate once the obligations and costs of selling are deducted.

Escrow Account
Funds which are set aside and held in trust by a third party, usually to pay taxes and insurance on real estate.
Federal Housing Administration. A department of Housing and Urban Development which insures FHA mortgage loans.

Firm Commitment
A promise from a lender to make a mortgage loan with specific terms. A promise by FHA to insure a mortgage for a specific property and purchaser.

Fixed Rate Mortgage
A mortgage loan which would have a fixed interest rate and a fixed principal and interest payment amount for the entire term of the loan.

Gross Margin
The lenders profit margin on adjustable rate mortgages. This profit margin is usually in the 2-3% range and when added to the index rate, the sum equals the full note rate. For example, if the gross margin is 2% and the index rate is 10%, the note rate would be 12%.

Hazard Insurance
Also called homeowners insurance, it is insurance to cover losses due to fire, wind, vandalism, theft, etc.
Income Ratio
An allowable percentage of monthly gross income which the proposed mortgage payment cannot exceed.

The measuring device used to determine if interest rates have gone up or down over time. A wide variety of indexes may be used with adjustable rate mortgages.

Interest Cap
A consumer protection which limits the amount of interest that a loan may be increased or decreased. Yearly interest caps and life of loan caps are available with many loans today.

Interest Rate Buydown
The payment of money to a lender to reduce the borrower's interest rate either temporarily or permanently. This would help reduce the buyer's payments and help him/her qualify for the mortgage.
A charge against a property similar to a mortgage. A security instrument for repayment of a debt owed.

Loan To Value (LTV)
The relationship between the mortgage loan and the appraised value of the property which is expressed by a percentage. A 90% conventional loan (10% down) has a 90% loan to value ratio.
Market Value
The value of a property determined by comparable sales, or the actual sale price.

Mortgage Insurance Premium
Mortgage insurance premium is required on FHA loans. The M.I.P. (as is commonly referred to as) is paid by the borrower and insures the lender against foreclosure losses.

The mortgagee is the lender of money for the purchase of real estate. One who holds a mortgage on real estate.

The borrower of money to purchase real estate.
Negative Amortization
The opposite of amortization. In a negative amortization, the loan balance goes up instead of down, until the payments reach a fully amortizing level. Also referred to as deferred interest.

The signed obligation to repay a debt such as a mortgage note.

Origination Fee
The fee charged by a lender for processing a loan application. It usually amounts to 1% of the loan applied for.

Overall Interest Cap
A stated amount limiting increases or decreases in interest over the life of the loan.
Payment Adjustment Period
The time frame between payment adjustments made on adjustable rate mortgages.

A charge equal to 1% of the loan amount which increases or equalizes the lenders yield or rate of return. Each discount point is worth approximately one fifth of a percent in interest on a 30 year fixed loan.

Prepayment Privilege
The right of a borrower to pay off a loan before the maturity date without incurring penalty.

The amount of the mortgage debt which is presently owed.

Private Mortgage Insurance
Similar to FHA mortgage insurance premium, but it is provided by private mortgage insurance companies to lenders making conventional loans with less than 20% down. It protects the lenders against foreclosure losses.
Quit Claim Deed
The deeding or giving up of one's interest in a property to another party.

Obtaining a new mortgage loan on property already owned and replacing the existing loan with a new one. This is often done when the existing loan interest rate is high and a new loan can be obtained at a much better interest rate.
Satisfaction of Mortgage
Also called a "release of mortgage". A document issued by the lender when the mortgage is paid in full.

Second Mortgage
A mortgage which is recorded after a first mortgage is already recorded. The second mortgage is subordinate to the first mortgage.
Short Sale
Title Insurance
Insurance issued to the new owner of real estate to protect them against claims arising by reason of defects in the title to the property.

VA Loan
A mortgage loan made to a qualified veteran and guaranteed by the Veterans Administration. The "loan guarantee" is to the private lender making the loan to protect them against foreclosure losses.

Warehouse Fee
Many mortgage firms borrow funds on a short term basis in order to originate loans which will later be sold in the secondary mortgage market. When the rate of interest is higher on short term loans than on long term mortgage loans, the lender has an economic loss. This loss is offset by charging a warehouse fee.

A return on an investment which includes the interest rate charged, discount points paid and any other charges collected.

It is a GREAT time to buy a home so take advantage of today's low home prices and low mortgage interest rates.

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That's right...FREE Buyer Representation!!

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  Steve Hatfield
REALTOR® ABR, CRS, e-PRO Certified
CENTURY 21 Curran & Christie
25636 Ford Road
Dearborn Heights, MI 48127
Office: (313) 274-7200
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Licensed Realtor® Since 1987 (#6501221773)
realtor Accredited Buyer Representative Certified Residential Specialist e-PRO

Steve Hatfield, Realtor® provides professional real estate / home buying services to buyers and sellers in Dearborn Michigan, Dearborn Heights Michigan, the Wayne County MI (Southeast Michigan) communities of Livonia, Canton, Redford, Westland, Garden City, Plymouth, Northville and the Oakland County cities of Farmington / Farmington Hills and Novi Michigan.

Equal Housing OpportunityIn accordance with the law, the properties, real estate services and homes for sale featured on this web site are offered without respect to race, religion, color, creed, national origin, sex, physical limitations / disabilities or familiar status.

REALTOR® is a registered collective membership trademark that identifies a real estate agent / professional who is a member of the NATIONAL ASSOCIATION OF REALTORS® and subscribes to its strict code of ethics.

Century 21 Real Estate Corporation © and sm trademark and servicemark of Century 21 Real Estate Corporation. Equal Housing Opportunity. Each office Independently Owned and Operated.

Copyright © 1996 - Steve Hatfield
Graphics and content may not be reproduced or copied in any way with out written permission from Steve Hatfield.