Financing Definitions

Question 1

Adjustable Rate Mortgage

Answer 1

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.

Question 2

Amortisation

Answer 2

Gradual repayment of a debt by periodic instalments that cover both interest and principal.

Question 3

Annual percentage rate (APR)

Answer 3

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.

Question 4

Assumable loan

Answer 4

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.

Question 5

Balloon loan

Answer 5

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.

Question 6

Cap

Answer 6

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.

Question 7

Conforming loans

Answer 7

A mortgage loan that is eligible for purchase by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation

Question 8

Conventional Mortgage

Answer 8

A loan arranged by a borrower and lender that is not covered by governmental guarantee or insurance

Question 9

Credit Report

Answer 9

An assessment, provided by a local retail credit association, of an individual’s ability to repay debt.

Question 10

Department of Veterans Affair

Answer 10

Previously known as Veterans Association, the federal government that administers GI and VA loans

Question 11

Down Payment

Answer 11

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

Question 12

FHA (Federal Housing Authority)

Answer 12

An agency of the US Department if Housing and Urban Development that administers loan programs designed to make more housing available

Question 13

FHA Mortgage

Answer 13

A loan made by a local lending institution that is insured by the FHA

Question 14

Fixed Rate Mortgage

Answer 14

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.

Question 15

Interest

Answer 15

The amount, expressed as a % of the total, that the lender charges a borrower for the loan

Question 16

Loan Servicing

Answer 16

The paperwork involved in handling mortgage loans

Question 17

Loan-to-value Ratio (LVR)

Answer 17

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%

Question 18

Maturity

Answer 18

The date when a loan is due in full

Question 19

Mortgage

Answer 19

A written agreement that gives the lender an interest in the property as security for a loan

Question 20

Origination Fees

Answer 20

Charges to a borrower to cover costs associated with issuing the loan, including credit checks, title search expenses and home appraisal.

Question 21

PITI

Answer 21

Principal, Interest, Taxes and Insurance. The acronym is used to describe what’s included in the monthly repayment of a mortgage loan.

Question 22

Point

Answer 22

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.

Question 23

Private Mortgage Insurance (PMI)

Answer 23

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%

Question 24

Prepayment Penalty

Answer 24

A fee charged to the borrower if the loan is paid off early

Question 25

Savings and Loan Associations (S&Ls)

Answer 25

Banking institutions specialising in originating, servicing and holding mortgage loans

Question 26

Term

Answer 26

The period of time until a loan must be repaid

Question 27

Underwriting

Answer 27

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