Mortgage Terms

What is APR?

The annual percentage rate, or APR, is an interest rate that differs from the loan rate. It is the actual yearly interest rate paid by the borrower, including the points charged to initiate the loan and other costs.

The APR discloses the real cost of borrowing by adding on the points and by factoring in the assumption that they will be paid off incrementally over the life of the loan. The APR is usually about 0.5% higher than the loan rate and is commonly used to compare mortgage programs from different lenders.

The Federal Truth in Lending law requires mortgage companies to disclose the APR when they advertise a rate. The APR is usually found next to the mortgage rate in newspaper ads.

What is a loan-to-value ratio?

The loan-to-value ratio, or LTV, is the loan amount expressed as a percent of either the purchase price or the appraised value of the property. It is an important factor considered by lenders before approving a mortgage.

Lenders generally prefer a down payment of 20%, with an 80% LTV.

What about equity?

It is the cash value of your property over and above what is owed on it, including mortgages, liens, and judgments.

The amount of equity almost always grows in a home over the years, although the current economic slump and rampant depreciation has diminished equity for many homeowners.

Generally speaking, you can borrow against the equity that builds up in your home and use it for any number of reasons, including home improvements and to pay for college costs. The current economic climate, however, has made home equity loans more difficult to come by. Equity is also is a source of income for you once the home is sold.

Equity is also what makes seller financing possible. If you have money to spare, you can always lend some to the buyer and collect interest on it.

What is private mortgage insurance (PMI)

Also referred to as PMI, it is insurance you pay to protect the lender in case you default on the home loan. It is required when borrowers put down less than 20% of the purchase price.

Usually, a small fee is paid at the outset and a percentage of the face amount of the loan is added to the monthly payment.

What is a prepayment penalty?

Some mortgages have prepayment penalties written into them. This means you will have to pay the lender a percentage of the principal, or some other stated amount, if you decide to repay the loan early.

The prepayment clause is usually in effect for only one to three years and may be waived for special circumstances. Lenders impose the penalty to recover any losses related to your early payment.

Ask about prepayment penalties before signing for a home loan. If you are applying for a new loan, the penalty should be disclosed in the truth-in-lending statement.

What are subprime loans?

Subprime mortgages are made to borrowers, usually at a higher interest rate, who do not meet traditional credit criteria or who have unconventional borrowing needs.

Factors that can prevent someone from meeting the traditional criteria could be a high debt-to-income ratio, low reserves at settlement, as well as past credit woes-bankruptcies, defaults, foreclosures, or chronic late payments on debt obligations.

What is amortization and negative amortization?

When you amortize a loan you basically pay off the principal by making regular installment payments. This typically takes place gradually over several years.

Negative amortization is when the mortgage payment is smaller than the interest that is due, which causes the loan balance to increase rather than decrease. Negative amortization only happens with adjustable rate mortgages (ARMs) with certain features, including an initial payment that does not cover the interest due, a feature that is supposed to increase the affordability of the loan.
With negative amortization, a persistent rise in interest rates reduces the equity in the house unless the negative amortization is offset by house appreciation.

Negative amortization has to be repaid, which means your payment will rise in the future. The larger the negative amortization, the more you will be required to amortize the loan in full.

What is a second mortgage?

It is a loan against the equity in your home. Financial institutions will generally let you borrow up to 80% of the appraised value of your home, minus the balance of your original mortgage.

You may incur all the fees normally associated with a mortgage, including closing costs, title insurance, and processing fees.
Home improvement loans are often written as second mortgages. And sometimes you can get a college tuition loan by using a second mortgage.

In case of default, the loan is paid off from the proceeds of the sale of the property, after the first mortgage has been paid off first.

Is a home equity line of credit (HELOC) similar to a second mortgage?

A home equity loan, like a second mortgage, lets you tap up to about 80% of the appraised value of your home, minus your current mortgage balance. But because it is set up as a line of credit, you will not be charged interest until you actually make a withdrawal against the loan, although you will be responsible for paying closing costs.

The withdrawals can be made gradually as you begin to pay contractors and suppliers for handling your remodeling project.

The interest rates on these loans are usually variable. Of particular importance: make sure you understand the terms of the loan. If, for example, your loan requires that you pay interest only for the life of the loan, you will have to pay back the full amount borrowed at the end of the loan period or risk losing your home.

"Helping Our Heroes Find Their Home"