Financing Definitions Flashcards
Adjustable Rate Mortgage
A mortgage loan where the interest rate changes periodically over the period of the loan.
The rate is usually lower than for fixed rate mortgages, so these loans are often initially more affordable. But the come with risk that the interest rate will increase.
Amortisation
Gradual repayment of a debt by periodic instalments that cover both interest and principal.
Annual percentage rate (APR)
The effective rate of interest for a loan. The APR reflects all the costs of financing - incl. points, origination fees and other costs finance charges - and is usually higher than the interest rate alone.
Assumable loan
An existing loan on the property that the seller is able to pass onto the buyer.
Interest rates on assumable loans are often lower than the going rate, making them an attractive feature of a deal.
Balloon loan
Mortgage loan in which the remaining amount is fully due and payable at a specified, predetermined date.
Balloon loans usually have better interest rates, but you’ll have to be prepared to pay for the full amount of the remaining balance at the specified time.
Cap
The limit on the amount of an increase (usually 2%) charged by a lender under the terms of an adjustable rate mortgage. Caps protect the borrower from large, unexpected interest rate increases.
Conforming loans
A mortgage loan that is eligible for purchase by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation
Conventional Mortgage
A loan arranged by a borrower and lender that is not covered by governmental guarantee or insurance
Credit Report
An assessment, provided by a local retail credit association, of an individual’s ability to repay debt.
Department of Veterans Affair
Previously known as Veterans Association, the federal government that administers GI and VA loans
Down Payment
Cash paid by the buyer at the settlement representing a % of the purchase price. Different types of loans my require different percentages of down payment
FHA (Federal Housing Authority)
An agency of the US Department if Housing and Urban Development that administers loan programs designed to make more housing available
FHA Mortgage
A loan made by a local lending institution that is insured by the FHA
Fixed Rate Mortgage
A mortgage loan whose interest rate is fixed for the entire term of the loan.
The most common are 15-year and 30-year fixes rate mortgages. The interest will usually be higher than that of an adjustable rate mortgage, but it won’t ever go up.
Interest
The amount, expressed as a % of the total, that the lender charges a borrower for the loan
Loan Servicing
The paperwork involved in handling mortgage loans
Loan-to-value Ratio (LVR)
The amount of a mortgage loan compared to the value of a property purchased.
A $100,000 house with a $80,000 Mortgage has a loan-to-value ratio of 80%
Maturity
The date when a loan is due in full
Mortgage
A written agreement that gives the lender an interest in the property as security for a loan
Origination Fees
Charges to a borrower to cover costs associated with issuing the loan, including credit checks, title search expenses and home appraisal.
PITI
Principal, Interest, Taxes and Insurance. The acronym is used to describe what’s included in the monthly repayment of a mortgage loan.
Point
One percent of a mortgage loan amount. A point is an additional charge by the lender at the time of loan origination as a placement or service fee.
Private Mortgage Insurance (PMI)
Insurance against default issued by a private company on conventional mortgage loans. Such insurance is usually required when the loan-to-value ratio is more than 80%
Prepayment Penalty
A fee charged to the borrower if the loan is paid off early
Savings and Loan Associations (S&Ls)
Banking institutions specialising in originating, servicing and holding mortgage loans
Term
The period of time until a loan must be repaid
Underwriting
The formal approval or denial of a loan based on the purchasers ability to pay off the loan and the value of property as collateral
