Glossary for Mortgages
By Sadiya Anjum
Amortization, points, foreclosure, default, debt to income ratio terms that you are about to hear a lot if you are applying or have just applied for a mortgage. If this is your first time, you need to do some study to know exactly what will be happening with your home and you. Here is a list you need to familiarize yourself with as this is the jargon of the mortgage world.
Credit Report Produced by a credit bureau your credit report will show your credit history and personal details. Your credit history basically means how much you owe to whom, have you been making your payments on time etc. Your personal details will include your previous addresses, employment record and lawsuits you have been involved with. A credit report maybe utilized by a lender to check on details like your capacity to make payments on time.
Principal is the amount of money that is owed as a debt meaning the amount of money you will be borrowing. Interest is calculated on this amount.
Down payment is a cash payment made by the buyer and is calculated as a certain percentage of the selling price of the property. It is basically equivalent to the difference between the selling price of the house and the amount of mortgage.
Term is the time decided to pay off a loan.
Interest is basically a fee to be paid to a bank or creditor for giving you a loan. Interest is a percentage charged on the principal.
Point is sometimes charged by creditors and is a portion of the total amount funded.
Amortization Through monthly payments, one reduces the total amount owed to the creditor. This process of reduction of amount owed over a period of time and finally clearing the debt by a certain date is called amortization.
Insurance is when a party will cover/ pay for damage or loss to a property in return for premiums paid (prepayment). Insurance for the property against which a borrower is obtaining a mortgage should be taken out.
Taxes In particular, property tax is a compulsory amount paid to the government to fund public projects like construction of schools, roads etc.
Premiums In case of a down payment of less than 20%, a lender may charge additional premiums. This amount will safeguard the borrower if he fails to make payments. After repayment of over 75% of the loan, premiums will not have to be paid any more.
Debt to income ratio even referred to as credit worthiness is also a factor that maybe considered by lenders before agreeing to a mortgage. This ratio is calculated by dividing your monthly debt by monthly income. Lower the ratio the better it is. This determines your capacity to repay debt and will play a role in deciding how much loan you qualify for.
Default usually refers to failure to make payment on time. But this also includes any other violation of the agreement like failure to maintain insurance.
Foreclosure is the forced sale of a property if the owner has defaulted (failed to make payments on time).
Repossession The lender takes over a property if the owner defaults, as the property serves as collateral in the case of a mortgage.
Lien is the claim a lender holds of acquiring the property as security or selling it as repayment of loan if the owner fails to do the same. This is basically a guarantee for payment of loan.
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