Your Mortgage : Learning the ‘Lingo’ May Help in Selecting Loan : Mortgages: Lenders have a number of terms that define various available options. It pays to understand them.
Searching for a mortgage loan can be a confusing task, especially if you’re a first-time buyer. But knowing some basic “lender lingo” can make it easier to choose the loan that’s right for you, and it’ll also help demystify the entire home loan process.
“If you know some basic lender’s jargon, you can compare loans easier and you won’t find all the paper work that’s involved so confusing,” said George Hunter, national sales manager of lending giant Home Savings of America.
You probably already know several common terms, such as amortization and appraisal. But if you’re going loan shopping soon, here are some other terms that you’ll likely hear that may not be so familiar:
Back-end debt ratio: The percentage of your gross monthly income that will be used to pay off your principal, interest, taxes and insurance, plus all your other long-term debt. Many lenders define “long-term” as any debt that will take more than 10 months to repay.
Conforming loans: Loans for $187,450 or less. The ceiling reflects the maximum-sized loan that the lender may sell on the secondary market to the Federal National Mortgage Assn. (Fannie Mae) or the Federal Home Loan Mortgage Corp. (Freddie Mac).
Rates on conforming loans are usually about one-half of a percentage point lower than rates on nonconforming loans.
Conventional loan: A loan that is made by a private institution and isn’t guaranteed or insured by a government agency.
Convertible mortgage: A loan that typically starts out with a below-market adjustable rate but can be converted to a fixed-rate loan during a specified period of time, usually between the end of the first year and the start of the sixth.
Due-on-sale clause: A clause in a loan agreement that requires the loan to be paid in full when the home is sold or transferred. Sometimes called an “alienation clause.”
Front-end debt ratio: The percentage of your gross monthly income that will be devoted solely to making your housing payments, including principal, interest, taxes, insurance and any homeowners association dues.
Index: The base figure used to determine the interest rate charged on an adjustable-rate mortgage. The most popular index in the West--as well as in a growing number of Eastern states--is the 11th District Cost of Funds Index, a relatively slow-moving figure that reflects Western lenders’ own borrowing costs.
Lock-in agreement: An agreement between a lender and a borrower that calls for the lender to make a loan at a specified rate, even if rates rise between the time the completed application is accepted and the time the loan is actually funded. Some lenders charge for these types of agreements while others do not.
Margin: The spread, or “markup,” that the lender adds to an adjustable-rate mortgage’s underlying index to make a profit. If the index rate is 8 1/2% and the margin is 2 1/2 points, your actual loan rate will be 11%.
Mortgage banker: A company that provides loans with its own funds. Rates and terms offered by one mortgage banker often differ from rates offered by others.
Mortgage broker: A person or company that represents several lenders instead of just one. While a mortgage broker can locate the best loan for a borrower, he will also charge a fee for his services.
Negative amortization: A condition created when a loan payment doesn’t cover all the interest due on a loan. Although payments are made on time, the outstanding balance gets bigger, not smaller.
Many adjustable-rate mortgages today are subject to negative amortization. Lenders usually don’t like the sound of this term, so they prefer to call it “deferred interest.”
Nonconforming loans: Loans for more than $187,450, commonly referred to as “jumbo” loans. Lenders can’t sell these loans to Fannie Mae or Freddie Mac, so rates on nonconforming loans are typically about one-half of a percentage point higher than rates on conforming loans.
Point: Typically, 1% of the total loan amount. If you’re seeking a $150,000 loan and the lender will charge two points, you will be expected to pay $3,000 ($150,000 by .02) in points.
Prepayment penalty: A fee that’s charged to a borrower who pays a loan off prior to its due date. Some loans carry prepayment penalties, while others do not.
Private mortgage insurance: Insurance against a loss that a lender may suffer if the borrower defaults. The policy is similar to insurance provided by the Federal Housing Administration, but it’s issued by a private-sector company instead of a government agency.
Private mortgage insurance, commonly referred to as “PMI,” is typically required when a borrower makes a down payment that’s less than 20% of the home’s purchase price.
Regulation Z: The Federal Reserve Board regulation issued under the Truth-in-Lending Law, which requires that a borrower be advised in writing of all costs connected with a loan.
If you want a more detailed list of key terms and more information about the home loan process, several free booklets are available.
Many lenders--including Home Savings of America and Great Western Bank--offer consumer-oriented brochures that contain glossaries and important tips for would-be borrowers. They’re available, free-of-charge, at most local branches across the nation.
The Mortgage Bankers Assn. of America also offers a free brochure entitled “How to Shop for a Mortgage” that describes the various types of home loans and includes a primer on the loan application process. Requests should be sent with a stamped, self-addressed, business-sized envelope to the trade group’s consumer affairs department, P.O. Box 65299, Washington, D.C. 20005.
