Mortgage Terminology
Thinking of getting a mortgage to purchase or refinance a home. There are a number of different options and it all gets a little confusing. Understand the mortgage terminology that lenders use to help prepare you when you search for that new home loan.
What is a Mortgage?
A mortgage is a lien on the property that secures the Promise to repay a loan. A loan to finance the purchase of real estate, usually with specified payment periods and interest rates.
What is the difference between a mortgage and a loan?
Mortgages are types of loans that are secured with real estate or personal property. A loan is a relationship between a lender and borrower. The lender is also called a creditor and the borrower is called a debtor.
What is a Promissory note?
A promissory note is a written promise to pay an amount of money by a specified date (or on demand). The promissory note could involve a loan from a bank, a loan from a relative, etc. It spells out the terms and conditions that a loan will be paid. Ie interest rate, length of time etc.
What is a Mortgage Broker?
A Mortgage broker is a professional who works for a firm that originates and processes loans for a number of lenders.
What is a Mortgage Banker?
A Mortgage banker is a company that originates loans and resells them to secondary mortgage lenders. These secondary mortgage lenders convert mortgages into securities and offer them for sale to investors.
What is Fannie Mae?
Fannie Mae is sort of acronym which stands for Federal National Mortgage Association (FNMA); a federally-chartered enterprise owned by private stockholders. This enterprise purchases residential mortgages and converts them into securities for sale to investors; by purchasing mortgages, Fannie Mae supplies funds that lenders may loan to potential home buyers.
What is Freddie Mac?
Freddie Mac is sort of an acronym which stands for Federal Home Loan Mortgage Corporation (FHLM); a federally-chartered corporation that purchases residential mortgages, coverts them into securities, and sells them to investors, providing lenders with funds for new home buyers.
What is Mortgage Insurance?
Mortgage insurance is a policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan. Mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home’s purchase price.
What is a ARM?
ARM is acronym for “Adjustable Rate Mortgage” . This is a mortgage loan subject to changes in interest rates. When rates adjust, ARM monthly payments increase or decrease at intervals determined by the lender. The change in monthly payment amount, however, is usually subject to a maximum amount that it can adjust. The maximum it can adjust will be documented in the mortgage contract.
What is an Assumable Mortgage?
Assumable mortgage is a mortgage that can be transferred from a seller to a buyer. Once the loan is assumed by the buyer the seller is no longer responsible for repaying it. There may be a fee and/or a credit package involved in the transfer of an assumable mortgage.
What is Amortization?
Amortization is the repayment of a mortgage loan through monthly installments of principal and interest. The monthly payment amount is based on a schedule that will allow you to own your home at the end of a specific time period.
What is a FHA loan?
An FHA loan is a mortgage that’s insured by the Federal Housing Administration (FHA). Essentially, the federal government insures loans for FHA-approved lenders in order to reduce the lenders risk of loss if a borrower defaults on their mortgage payments. First time home borrowers like FHA loans for they generally need to put less money down and hence can purchase a home quicker since they don’t have to save up for a bigger down payment.
What is a Nonrecourse Loan?
A Nonrecourse loan is a type of loan secured by collateral, which is usually property. If the borrower defaults, the issuer can seize the collateral but cannot seek out the borrower for any further compensation, even if the collateral does not cover the full value of the defaulted amount.
Hopefully the above helps get you familiar with mortgage terminology used in the Mortgage industry.