Purchasing a home is a smart investment move and you have to be matured, vigilant and sober up on your first attempt! However, if you’re purchasing a home for the first time, it may be difficult to understand and get your mind wrapped around all these property or mortgage terminologies, so when you first apply for a mortgage, you may feel overwhelmed by all these confusing terms and it is like you are being ushered into a new language & new culture but do not be alarmed, I’ve got your back.
More than likely, your mortgage professional or loan officer or consultant is throwing many new terms and expressions at you, yet it is the very responsibility of that same mortgage professional to make sure that you understand everything that’s being explained to you, so you should never feel pressured or pretend that you are on the same page yet you are drowning in confusion, overwhelmed and constantly in a state of flux, so do not hesitate to ask them to stop and clarify and yes patience is required, otherwise it will end up being a costly exercise for YOU.
However, if you can approach your application meeting armed with some familiarity with mortgage terms, everyone can be more comfortable from the very beginning. Familiarize yourself with the following and you’ll be one step ahead of the average first-time borrower and you will not be “tossed around the ship like a drunken sailor” and being taken advantage of.
When you are searching for or reading through any mortgage news flash, there are some terms that are so crucial to how you perceive the written word and the paperwork. If you aren’t familiar with all of the terms involved, then you might misunderstand what the document is saying and agree to something that you might not mean to, especially the legal and financial jargon that is normally written in, and end up paying a high price for this costly mistake, so do not fall into the trap before committing yourself into 20-30 years “jail sentence” that you could have avoided in the first place.
Here are some of the basic mortgage terms that you should understand before you sign and commit to anything:
1. Creditor is the holder of the current deed to the property that the buyer is interested in and attempting to buy and is also the party who is selling the property. They legally own the property and have the legal right to sell it, or secure it by a mortgage. This is usually the mortgage company, bank, or other lending institution. The creditor is also listed as the mortgagee or lender in some cases.
2. Debtor is the party who is buying the property. If you are looking to purchase the property, then the debtor is you. This party must ensure that they are able to repay the mortgage to the creditor before the creditor will sign the mortgage.
3. Conveyance is the term for the legal exchange of the property from the creditor to the debtor(usually done by a set of lawyers representing both the buyer and the seller).
To effect this exchange a purchase offer must be signed by both the debtor(buyer) and the creditor(seller) and it is a legally binding document on which the bank or lending institution grants the mortgage and the conveyancers acts on behalf of both buyer and seller on the instruction of this document to exchange(pass on the rights to own) the property from the seller to the buyer and there are also costs involved that must be paid by both the buyer and seller.
4. Closing Costs are the expenses involved in finalizing a mortgage. Closing costs include lender/agency fees, loan origination costs, escrow payments, title insurance, attorney fees, etc. Closing costs are often shared between both the buyer and the seller.
5. Escrow is at the end of the mortgage process where a neutral third party obtains the documentation and money involved in the transaction until the transaction is complete. An escrow account is also used to hold the property tax and insurance monies that are collected during payment of the loan.
6. Principal: Principal is the original amount borrowed from the lender. It does not include interest or other fees. It’s the lump sum the borrower gets from the lender.
7. Margin – the part of the interest rate from which the lenders profits. The margin plus the index rate is the total interest rate. While the index will change throughout the duration of the adjustable-rate mortgage, the margin will not.
8. Points: Points are a percentage of the principal of the loan used to lower the interest rate of a loan. There are two types of points: Discount Points and Origination Points. Discount Points reduce the interest rate of a loan by having the lender pay more at closing.
One point equals one percent. So, if you want to lower your interest rate by one percent, the borrower needs to pay one percent of the principal at closing. However, this does not lower the principal amount. It merely lowers the interest rate. Origination Points are used is the same fashion and utilized to cover the loan processing expenses.
9. Hypothecation this is just a fancy term for the debt that is incurred by the mortgage. This is what the debtor has when they sign the mortgage(deposit or unencumbered cash) and turn over the money to the seller of the property or the lending institution where the mortgaged has not been paid in full.
10. Redemption this is when the mortgage, or debt, is paid in full.
11. Mortgage by demise is when the creditor assumes ownership of the property until the debt is paid in full. This form of mortgage was widely used in the past, as the buyer never had just enough cash to buy out the seller outright, therefore had to pay in installments until the debt was paid in full, but it is hardly ever used today
12. Mortgage by legal charge is the basic type of mortgage that is available today. In this case, the debtor (or buyer) is legally the owner of the property, but the creditor retains enough rights over the property to ensure that they will be paid. This will be practised and can approapriate where it is a private arrangement.
13. Adjustment period – The period between interest rate adjustments, usually denoted in the format of 1-1. The first number is the initial period of the loan for which the interest rate will remain the same. The second number is the adjustment period. It shows denotes the frequency at which the interest rate can be adjusted.
14.The index is one of the most important considerations in choosing an adjustable-rate mortgage. the guide used by lenders to measure changes in the interest. Each adjustable-rate mortgage is linked to an index. Even though you don’t have control over the specific index that is used by a particular lender, you can choose a loan and lender according to the index that will apply to the particular loan in which you are interested.
Loan Choosing Tip: A lender you are considering can give you an indication of the performance of the loan in the past. The ideal loan is one that has an index that has historically remained stable. As you consider loans and lenders, make sure you also consider the margin rate that the lender offers.
15. Adjustable Rate Mortgage (a.k.a. ARM Loan): An Adjustable Rate Mortgage is a home loan where the interest rate adjusts throughout the term of the loan. ARM Loans usually have an initial interest rate that is lower than that of a Fixed-Rate Mortgage. This low-interest rate is locked for a set length of time. Once that time has expired, the interest rate can go up based on market factors.
The initial lower interest rate helps those who can not afford a fixed-rate mortgage get financing for their home. However, the interest rate will most likely increase after the initial term of the low-interest rate expires.
Negative amortization is a key, so watch out when you are choosing an adjustable-rate mortgage. This happens when a particular loan has a cap on payments that keeps them from covering the amount of interest on the mortgage. As a result, the unpaid interest is added to the loan, thus causing the amount of the loan to balloon, even though you are making payments.
Avoid Negative Amortization like plague at all costs as it does not benefit you the buyer(borrower) in the longer term, it benefits the bank or the lending institution and they will never tell you this, as they would like to take advantage of you and the situation that you find yourself in, for the most part, so please be aware of this and be vigilant.
You can start out with a positive amortization on your adjustable-rate mortgage but end up with a negative one due to interest rate increases and fluctuations. The best way to avoid negative amortization is to avoid adjustable-rate mortgages that have a payment cap.
Loan Choosing Tip: Many borrowers wonder about the benefits of an adjustable-rate mortgage since the payments can increase over time. In most cases, the benefit of an adjustable-rate mortgage comes into play when the interest rate of the ARM is lower than the fixed-rate mortgage. The possibility of a pay increase is sometimes insignificant. This is true if you do not plan to occupy the house for an extended period or if you expect your income to increase over the life of the loan.
16. Annual Percentage Rate (APR) is the interest rate quoted by the lender plus additional home loan costs. Additional costs include origination fees, points, etc. APR is often higher than the stated interest rate.
17. Fixed-Rate Mortgage is a loan where the interest rate stays the same. It does not fluctuate while the loan is being paid off. Financing for fixed-rate mortgage loans is commonly spread out over 10, 15, 20, or 30 years. This type of loan is popular because there are typically no surprises. Since the interest rate remains the same, the monthly mortgage payments remain the same throughout the payment of the mortgage and do not change year to year.
Knowing the terminology involved in your mortgage will help you stay on top of the mortgage process game and allow the entire process to run smoothly. Read up on these terms and keep yourself out of the dark.
This is not by any means an exhaustive and comprehensive list of the new terminology you may come across when securing a mortgage(home loan), but learning and understanding these terms will go a long way in helping you understand what your loan officer(professional) is talking about when you sit across each other in the room when it comes time to finance a property for you as a first-time homebuyer (soon to be the owner).
Thank you for reading this blog post, trust that you are now armed with knowledge and would not be taken advantage of when approaching these lending institutions and you are welcome to share, engage and add your story to this article that would be greatly appreciated. Please do not hesitate to leave a comment.