Terms to Know
 Mortgage = financial transaction, a promise with official documentation
and government regulations that you will repay a high debt. (Mortgage is
the loan itself)
 Interest rate vs APR = interest rate is the cost of borrowing the principal
The APR is higher than the interest rate because it includes other costs
associated with borrowing the principal such as the interest rate, broker
fees, closing costs, discount points.
 One way to lower your APR is by using mortgage or discount points.
One mortgage point = 1% of the loan amount
Each point you purchase will buy down your mortgage rate by up to .25%
Example: on a 300k home loan, 1% is 3k, so it’ll cost you 3k to lower your
apr by .25%
 Mortgage rates = the interest rate charged on the loan, the rate is
constantly changing because it is based on market conditions. The rate
you get will also depend on your individual financial health.
(To get the best rate = excellent credit score, low debt, good down
payment)
Market condition include the economy, characteristics of the housing
market, and the federal monetary policy.
 Different types of loans/mortgages =
30-yr fixed: payment and interest rate are fixed over 30 years. The rate
you are given is how much interest you are paying for that loan. The
payment you give primarily pays the interest and smaller amount is
applied towards the principal. When interest is all payed off, the loan
gets paid quicker.
5/1 ARM: adjustable rate mortgage. Rate can change according
depending to an index. 5/1 means a hybrid rate, meaning it is a fixed rate
for 5 years and then it can change every 1 year.
The index used to determine the interest rate is the 10-yr treasury rate.
If the 10-yr interest rate is 2%, then the bank will charge a premium (1%)
so they can make money too, so it might be 3%.
Least risk for the bank is the ARM
Most risk for the bank is the fixed rate
4 types of mortgage loans = fixed rate, FHA mortgages, VA mortgages, &
interest-only loans
FHA is not the lender, they just back up qualified lenders in case of
mortgage default. (For people w credit problems or low income)
VA mortgages is for veterans affairs.
 Earnest Money = a deposit made to the seller that represents the buyers
good faith to buy a home, there is no required amount. Funds are held in
an escrow account until closing, then the earnest money is applied
towards the down payment and closing costs.
 Loan-to-Value Ratio = LTV, the value of your home compared to the
amount you owe on your mortgage loan.
Lenders use LTV to calculate risk, the MORE you pay the loan down the
lower your LTV.
 Escrow =
To facilitate transaction of a house: an account opened from a trusted
third party that will make sure borrower/lender both fulfill requirements
in the contract. Earnest money, down payment, & financing (loan) is
deposited into escrow account.
To make sure costs are being payed: When paying mortgage payment,
some of your mortgage payment amount goes towards interest, some
towards the principal, THEN an additional amount is set aside for house
insurance and taxes which is held in an escrow account.
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As you pay your mortgage (debt), your equity (wealth/ownership)
increases.
Interest payments are tax deductible meaning you can subtract that
interest payment amount from your income SO you will be taxed a less
percentage bracket.
 Contingencies = contingency clauses are conditions that must be met for
the contract to become binding.
Appraisal contingency = protects the buyer and is used to ensure the
property is valued at a minimum certain amount
Financing/mortgage contingency = gives the buyer time to obtain
financing for the purchase of the property
Inspection or Due diligence contingency = gives the buyer the right to
have the home inspected within certain time period
 Title Insurance = to protect the buyer for ownership of the property,
beneficial for everyone
Title vs Deed vs Lien = possession is not ownership. Title: legal
ownership of the property, the right of possession, controls enjoyment,
anything to do with the house
Deed: the physical official written document declaring a persons legal
ownership of property
Lien: claim of ownership of the house due to a fault of service or money
 So when you sell a house the title company will conduct a title search to
see if seller has any IOUs with anyone that will cause potential problems.
Title search will look at all transactions in history and to see if any taxes
are owed, bankruptcy filings, contractor work.
 Balloon payment = its attached to the end of the loan to cover
remaining balance. (Most likely 2x normal payment)
 Balloon loan = relatively short term and only a portion of the loans
principal is amortized and the final payment is generally large
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 Amortization = the schedule of your monthly mortgage payments, it
shows how much of your mortgage payment goes towards interest and
how much for the principal
 Amortized loans = loans generally paid off in 15 or 30 years with equal
amounts paid.
 Appraisal = developing an opinion of the value of the property
 Mortgage Insurance = HOI, homeowners insurance, protects your lender
if you default on the loan. If you miss your payments the money you’ve
paid towards the insurance will satisfy the lenders need for debt
payment.
 Closing costs = the fees you pay for closing a mortgage. The closing costs
are for the services that were given during the whole process of you
owning a home. About 2-5% of your home purchase price.
 4 C’s = credit, collateral, capacity, capital
Credit: good credit is essential for the best financing terms
Collateral: lenders need to determine that the property is good collateral
for the loan, that’s why lenders NEED appraisals, inspections, and title
insurance
Capacity: the customers ability to repay the loan. The main factors is
establishing the capacity is available income and stability of that income.
Lenders need verification of your income and employment.
Debt to income ratio will be needed DEBT / INCOME = DTI soooo the
lower the DTI the better financial terms you will get, little debt high
income is goal
Capital: lender will require proof that the customer has sufficient funds
available for down payment, closing costs. And any cash reserves
required.
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