How To Move Handbook

How To Talk Mortgage Talk

YOUR Mortgage

HERE is a PARTIAL selection of mortgage terms you should understand before you apply for a loan. They are from  Steiners Complete How To Talk Mortgage Talk which defines all the terms bankers, brokers, and loan officers may throw at you.

 NOTE: The following terms are in alphabetical order for ease of use when you come across a word or concept you don’t know. If this is the first time you’ve gotten a loan or you haven’t talked to a lender for several years, it’s a good idea to browse the list for an overview before starting your interviews.

 All words in bold are cross-referenced in this list, so if the definition of one term isn’t enough, you can check the other terms involved.

 “_____A,”  “_____B,”  “_____C,”  “_____D”  Credit Rating—An “A” credit loan applicant has borrowed in the past and shown a consistent pattern of responsible (i.e., on time) repayment. If you’ve been late on payments, even a $29 credit card bill, you can have a Ding On Your Credit. If you’ve been late more than twice, it’s considered a major Ding, and you’ll have some explaining to do to meet many lender’s  Borrower Qualifications.

The more Dings, the lower your rating, the worst being a “D”—when you’ve been through a bankruptcy and/or foreclosure during the last seven years. If you find you’re in the “B” or “C” rating, try the higher Rate lenders that advertise on the Internet and in large newspapers. If you’re a “D,” set up a repayment plan with any remaining outstanding debts, establish a regular payment history, and expect that most lenders will be reluctant to talk home loans with you until at least three years after either a bankruptcy or foreclosure.

Lenders are currently experimenting with finetuning these Credit Ratings to “_____A-,” “B+,”  etc., so that they can also adjust their Rates when making loans.

See also Credit Report, Credit Rating, and FICO Rating.

Adjustable Loan—Other common names include an “Adjustable Rate Mortgage Loan (ARM)” or a “Variable Loan.” Your monthly loan payments fluctuate according to an underlying Index. There are many varieties, but only two major types—those with and those without Negative Amortization. If there is no Negative Amortization, the loan is often called a No Neg Loan.

Lenders prefer Adjustables to Fixed because the borrower bears a major part of the risk of rising Rates. To promote them, they offer lower Initial Rates, higher Loan Amounts, and lower Origination Fees. When money is tight, many banks only offer Adjustables.

However, because your Adjustable payment changes can wreck your budget, you need to be particularly careful about signing on for this type of loan. Be sure your Loan Advisor writes out a Maximum Payment Scenario, so you have a complete idea of the risk you’re taking.

Tip: Lenders with Adjustable Loans will often allow somewhat higher Ratios. This means that if you’re willing to spend as much as 40% of your income on your reoccurring expenses, and your credit is good, the lender might qualify you for a larger Loan Amount.

 Tip: We advise considering an Adjustable only when you plan to leave or Refinance within three to five years or you need it in order to Qualify for the Loan Amount you want. An Adjustable should start off at least 4% cheaper than a Fixed (including all Loan Fees). It absolutely should not have Negative Amortization. Stick to your schedule of leaving or refinancing within a maximum of five years. By that time your Rate will almost certainly be on par or even higher than a market Fixed Rate Loan.

 Affiliated Companies—Companies offering services connected with your obtaining your loan, which are owned by or otherwise Affiliated to your lender. The lender is required to Disclose possible Affiliations with their Truth in Lending documents when you make out your loan Application.

 Trap: Some services, like Appraisal, tax notification, or Flood Insurance certification, can be automatically charged with your Closing Costs. Others, like Hazard or Flood Insurance, can only be charged if you fail to provide your own policy.

 Tip: Always ask what services you can obtain separately, and shop several providers for those services. You can almost always save money with an outside provider.

 Amortization—The process by which the Principal Loan Amount you borrowed “dies off” a little with each month’s payment until the entire amount is paid off—most commonly after 30 years. The Principal portion of your monthly payment is small in the first years, with most of the payment going to Interest. Later, the Principal Amortization dollars slowly become a larger part of the payment, even though, with a Fixed, the actual payment amount remains the same. The result is that in later years you have less tax deductible interest, but more of your payment is going to Amortize—pay off—the loan.

 Amortization Schedule—The columns of numbers that tell you and the lender how much of your payment each month is allocated to Interest and how much to Principal. There are many Online Amortization Schedule programs listed in our National Money$ource Directory. The best ones include “cumulative cost” columns, which tell you the total amount you will have spent over time.

 Tip: On our Loan Evaluation Worksheet, we ask you to total up your expenses for the first five years as you’re evaluating which loan is best for you. You may want to modify this question to three years—if you’re planning on moving soon—or longer than five years, if that’s your intent.

 Application—Usually refers to the lengthy Uniform Residential Loan Application (URLA) questionnaire that nearly all lenders currently require a borrower to fill out as the first step in applying for the loan. It used to be that there were as many different Application forms as lenders, but with the strength of the Secondary Market, which requires a URLA, even Portfolio lenders have gone to the standard form.

See also CLO and Online Application.

 Tip: Get a URLA form from a Loan Advisor (or Online) and fill it out very early in the loan hunting process, so that you know you’ve assembled all the required information. You should always work from the same original draft form if you decide to Double App more than one lender.

 Tip: Always keep your own copy of the Application that you’ve given a lender. You’ll need to refer to it as questions come up during the Underwriting/Processing stage, and even after you’ve been granted the loan, it’s wise to keep the Application along with the other Loan Agreement papers you’ll receive, If you ever have a disagreement with a lender as to how the loan is to be administered, you’ll need to know everything said on all signed documents.

 Application Fee—Lenders don’t like you to apply to more than one institution at a time. When money is tight and it’s hard to get a loan, they often insist on an Application Fee, which is forfeit if you don’t take their loan. This Fee usually runs between $100 and $200. Almost always the Fee is fully refundable if they don’t grant you the loan they’ve offered you, although sometimes they insist on keeping the portion they’ve already spent on the Credit Check and the Appraisal. The amount and policy differs widely from bank to bank, so always include questions about their Application Fee in your Loan Evaluation.

 Appraisal—See also Market Value. The written assessment of the Market Value of the home. The appraiser usually works full time for the lender, but can be an outside consultant.

In either case, you typically pay an Appraisal Fee as a borrower Closing Cost, but you don’t always automatically get a copy of the Appraisal—apparently because there’s a fear you’ll use it to press for a revision. Ask for it. The law now guarantees you can have it, if you pay for it, but the tradition of not giving it dies hard.

 Tip: Don’t be afraid to press for a revision if something seems wrong. Appraisers make mistakes, just like anybody else. We’ve seen appraisers reconsider which comparables to select or even admit they missed an entire section of the house being appraised.

 Appreciation—when the Market Value of your home goes up. Reasons for Appreciation include work you might do to improve your home’s condition, changes in the neighborhood, or a rising economy, which affects all home prices.

 APR—Acronym for the Annual Percentage Rate. The APR formula takes the basic Interest Rate and adds in the lender’s Closing Costs.

By law, all lenders must quote you their APR as well as their Interest Rate. APR—in concept—makes it easy to compare the costs of different loans. It does work fairly well when comparing different lender’s Fixed Mortgages.  Unfortunately, the APR formula is not sophisticated enough to reflect the wide variations possible with Adjustable Loans, so today’s comparisons need real Maximum Payment calculations by your Loan Advisor.

See the Loan Evaluation Checklist in the Appendix.

 Assumable—If Interest Rates are high in the lending market when you go to sell, your buyer may want to Assume the existing loan. Most Adjustable Loans are Assumable if the buyer Qualifies and pays an Assumption Fee. Most Fixed Loans and Seconds are not Assumable.

 AUS/Automated Underwriting Service—The big, Secondary Market financing pools now offer this service to Mortgage Brokers and lenders, who can do their paperwork on a mainframe computer directly hooked up to the Stock Market pools.

This means that Underwriting your loan for resale to the pools can be done far more quickly and effectively than the old, paper system, although it’s not nearly as efficient or instantaneous as the credit card processing terminals you now encounter in the supermarket.

 Trap: Despite the fact that this computerization cuts costs for the Secondary Market and the Mortgage Broker or lender underwriting your loan, the Fee for this service (sometimes as much as $100+) is often passed on to you as one of your borrower Closing Costs.

Bait and Switch—Sadly, we’ve known a number of Loan Advisors who apparently believe that lying about low Rate Loan Program availability will build their business. Recently, we even spent six weeks with a Mortgage Broker dangling a wonderful Low Rate Program before us...who then Switched to a high Rate, 10% Fee Program at the last minute. Our surveys confirm that this tactic is common nationwide.

We’re happy to report that we escaped from our lying person (we can hardly call her a Loan Advisor) by activating a Double App with another Loan Advisor, who’d been honest about her Rates and Fees.

 Tip: Although there are ways to complain to the OCC (see the National Money$ource Directory for information) about Bait and Switch tactics, they are hard to prove, and, as far as we know impossible to use as a lever to force a lender into revising your Loan Program. This is the major reason we recommend a Double App.

 

Balloon Payment—Perhaps more appropriately, this is sometimes called a “Bullet Loan.” This is a loan that has to be paid off before the Principal is fully Amortized. Almost all Seconds have Balloon Payments at the end of five or seven years.

Some institutions offer lower Rates on Fixed Rate Firsts with a Balloon Payment coming due in five, seven, ten, or fifteen years, but the monthly loan payments calculated as though the loan Amortization term was still 30 years.

These loans are often called “a 30 due in 10,” etc. They may also carry a Prepay Penalty for much of the life of the loan, so that there is only a period of six to twelve months during which you can pay off this loan and replace it with another.

 Tip: This loan is not for the faint of heart, but, because the Rate can be very competitive, we do recommend it if you know you’ll be moving, or be able to Refinance, as the Balloon comes due.

Ask if the lender has an “automatic Rollover proviso” to guarantee a Refinance for you when the Balloon comes due. They may refuse to put a guarantee into the mortgage contract itself, but still write you a letter stating that Rollovers have been their general policy.

Except in very tight markets, they will usually Refinance—at the going market Rate—so long as you have a clean payment history. Ask what the rollover Fee is. It should be less than your current Origination Fee, because they already know your good credit. Unfortunately, it’s common for the lender to stipulate that the Fee will be set at the time of the rollover. If money is tight at that time, the Fee can be higher.

 Bi-Weekly Payment Mortgage—Some Adjustables have the borrower make payments every two weeks instead of once a month. The advantage to you is that paying Principal more often results in faster Amortization, thus saving you significant Interest payments over the Life of the loan.

 Tip: We don’t recommend this Loan Program, unless you are a very disciplined bill payer or you set this schedule up as a direct deposit to your lender from your regular checking account.

See Principal Paydown Payments for a more flexible, less stressful, Interest savings solution. 

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Selecting the lender and the loan is as important as deciding on the house. The wise buyer will start his loan arrangements before beginning the house search.