Getting a mortgage can be complicated, and there are many terms that may be unfamiliar to you. Rita the REALTOR® and I (Larry Loan Officer) put together this helpful glossary of terms to familiarize yourself with. Use this helpful guide as a quick reference of common terms that are often referred to when talking about loans.
Adjustable-Rate Mortgage (ARM)
Appraisal A professional estimate of the value of an asset. Mortgage lenders use official appraisals, prepared by professional real estate appraisers, to decide the maximum loan they are willing to finance for that property. Assets Something of current, perceived, or future economic benefit to its owner. Real estate is an asset; so is a bond, a business, a share of stock, a precious metal like gold, or a commodity like oil. A “promise to pay” is also an asset. A loan is an asset on the books of the lender, while accounts receivable are assets on the books of a business. Balloon Loan A loan that is not fully amortized. Since a balance will be left owing at the end of the term, the borrower will be expected to make a lump-sum payment at the end of the loan term, also known as a “balloon payment.” The borrower could do this with cash out-of-pocket, or by refinancing the loan. Bi-Weekly Mortgage A mortgage that is paid every two weeks, rather than monthly. The extra payments can significantly reduce the interest paid over the life of the loan. Chapter 13 Bankruptcy Known as the “wage-earner’s plan,” Chapter 13 Bankruptcy is used by debtors with stable income to propose a plan to pay their debts off, either partially or in full, with installment payments over 3-5 years.
A mortgage with an interest rate that adjusts periodically, based on market interest rates. They usually have an introductory fixed interest rate for 5, 7, or 10 years, after which the interest rate adjusts set intervals — for example, once a year. An ARM with a five-year fixed-rate term and then adjustments once a year would be referred to as a “5/1” ARM. The introductory interest rate tends to be low, but after that, the adjustments could dramatically raise (or lower) your interest expense and overall mortgage payment. Amortization The process of paying down a loan until the loan balance is paid in full. The root word “mort” (for “death”) refers to the gradual “death” of the loan balance. A loan that is “fully-amortized” will have a balance due of $0 at the end of the total loan term. A loan that is not fully-amortized will have a balance still due at the end of the term, usually requiring a “balloon payment.” Annual Percentage Rate (APR) The annualized interest rate of the loan. If you made interest-only payments with no principal, this is the percentage of your loan balance you would owe every year as interest. With a fixed-rate, fully- amortized mortgage, interest is assessed every month against the remaining loan balance as smaller fractions of the APR. As such, the interest you pay each month gets gradually lower and lower, while the principal paydown gets higher and higher.
RITA REALTOR | BROKERAGE 904-555-5555 | Rita@realtor.com | www.Authorify.com
LARRY LOAN OFFICER | OFFICE 904-555-1010 | Larry@loans.com | www.Authorify.com
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