CONSUMER LOANS VOCABULARY AND STUDY GUIDE Fixed Rate Mortgage: a home loan that has a fixed interest rate for the entire term of the loan Adjustable-rate mortgage (ARM): a home loan with a variable interest rate with an ARM, the initial interest rate is fixed for a period of time. Why are the initial interest rates offered for ARMs usually less than the rates offered for fixed-rate loans? You can change the yearly time you use the interest rate for fixed they stay the same Amortization table: a table that shows each periodic loan payment that is owed, typically monthly, and how much of the payment is designated for the interest versus the principal. How is the loan payment determined? Divide the interest rate you're being charged by the number of payments you'll make each year, usually 12 months How do the components - interest & principal - of the loan payment change each month? Through mortgage amortization Borrower or debtor: someone who loans from a bank or financial institution and has to pay the money back How does a credit score (FICO score) help or hurt borrowers/debtors? The higher the score, the better a borrower looks to potential lenders it helps determine the range they can get or if they’ll even be considered Capital: is typically cash or liquid assets being held or obtained for expenditures Collateral: something pledged as security for repayment of a loan, to be forfeited in the event of a default. Describe the difference between capital and collateral. Capital is the measure of the farmer's equity investment in the enterprise. Collateral is the question of how the loan is to be secured against business failure or loan default Closing costs: processing fees you pay to your lender when you close on your loan What do closing costs pay for?mortgage insurance, homeowner's insurance, appraisal fees and property taxes Contingency: A loan contingency sets specific conditions that must be met for the sale of a home to go through and can protect you from penalties if you're unable to get financing Counteroffer: An offer that was made to undermine the other offer Acceptance: Describe the negotiation process between the buyer and seller of a home when the initial offer is lower than the price the owner is asking for. A low initial offer may result in buying the property you desire for less than the listed price – or it may result in another buyer's higher offer being accepted. Creditor: a person or company who is owed money Down Payment: is money paid upfront in a financial transaction, such as the purchase of a home or car What are 2 sources of down payment money? Checking, savings or 401k Earnest money: or good faith deposit, is a sum of money you put down to demonstrate your seriousness about buying a home Why does earnest money usually accompany an offer? It protects you if something is wrong with the property it helps if you want out of the deal and proves your serious Equity: the value that would be returned to a company's shareholders if all of the assets were liquidated and all of the company's debts were paid off What are some financial advantages of owning your home? ● A good long-term investment ● Low-interest rates ● Building equity What two factors increase a homeowner’s equity? ● Appreciation, caused by inflation or improvements to the house or property; ● The continuing process of paying off the principal you owe on your first mortgage. When do you pay taxes on home equity? When you take it out Finance charge: the cost of borrowing money, including interest and other fees What is APR (Annual Percentage Rate)? the annual cost of a loan to a borrower Lien: a claim or legal right against assets that are typically used as collateral to satisfy a debt How would a lien on a house hinder the home buying process? putting a lien on a property is a cheap way of collecting what they are owed, sooner or later. Liens are part of the public record. Liens stay with the property when it is sold, but remains on the previous owner's credit report Market value (real estate): the price an asset would fetch in the marketplace, or the value that the investment community gives to particular equity or business. How is the market value used for tax purposes? The higher your home's assessed value, the more you'll pay in tax Mortgage: an agreement between the borrower and a mortgage lender to buy or refinance a home without having all the cash upfront What types of documents do you need to provide for a mortgage? ● Tax returns. Mortgage lenders want to get the full story of your financial situation ● Pay stubs, W-2s, or other proof of income ● Bank statements and other assets ● Credit history Why do you need to provide more information for a mortgage than for other types of loans? The more information you can provide the loan officer about your financial situation, such as debts and nonwage income sources, the more accurate the information on your Loan Estimate is likely to be Principal: the money that you originally agreed to payback Private Mortgage Insurance (PMI): a type of mortgage insurance you might be required to pay for if you have a conventional loan In order to avoid paying PMI how much does the down payment on a home need to be? t least one-fifth of the purchase price of the home Who does PMI protect? Rhe lender if you stop paying your loans What is the advantage to the buyer? PMI can open up more payment and housing options and offer different loan terms Car Title: a legal document establishing proof of ownership of a vehicle What is title insurance? a simple insurance policy that provides protection in the event someone comes along and contests your ownership of a property, as well as for those refinancing in the event that money is stolen when being wired and etc. Front End Ratio: aka the housing ratio this calculation shows what percentage of your gross monthly income will go towards housing expenses Back End Ratio: compares what portion of your income is needed to cover all of your monthly debts.
