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A Home-Hunter's Pocket Dictionary:
Don't Shop For A New Home Without It!
--by
Mary Ann Mayer
Associate Editor, New Homes Magazine
Are you nervous about buying a new home? Have you heard: "You
can't pick a mortgage until you shop around and decide which one is
best for you" and "You'll have a difficult time managing
the closing and all the details of buying your new home if you're
not clear on all the issues?"
Relax! This is one of the most exciting times of your life! Talk to
your friends who have been through the process, watch the real estate
section of the newspaper, and don't forget to keep an eye on us! We're
here to help you get on track and to make the entire home-buying process
go as smoothly as possible. This time, we've got a few terms for you
to add to your home-hunting vocabulary. You'll feel more comfortable
dealing with Realtors, salespeople and lenders when you put this extra
information under your belt.
Acceleration Clause:
A clause which gives the lender the right to demand payment in full
if you miss a payment or violate any other agreement stipulated by
the mortgage. Only some loans have this (yet another reason why it's
important to read the fine print!).
APR:
Annual percentage rate. Not to be confused with the interest rate
on the loan usually quoted by lenders, the APR reflects the total
yearly interest payment, which is the compounded interest plus points
and any other costs that were added to the loan. Savvy home buyers
will comparison shop for mortgages by asking for the APR as well as
the interest rate.
ARM: Adjustable rate
mortgage. This kind of loan has an interest rate which fluctuates
according to economic indexes. Pros: due to initially lower interest
rates, you may be able to qualify for a more expensive house than
you could with a fixed-rate loan with a higher rate. If interest rates
decline, you could save money. Cons: increasing interest rates. In
difficult times, higher payments due to rising rates could pose a
problem for those without extra savings.
Amortization:
The process of decreasing the loan principal by making payments balanced
to pay off a percentage of the principal, rather than just the interest.
See "negative amortization."
Assumable:
The buyer assumes the seller's mortgage payments, and there is no
change in the interest rate. Most assumable loans are ARM's. Some
require the seller to meet various qualifications.
Balloon
Mortgage: Regular payments are made throughout the term of
the loan, but at the end the leftover balance is due in full. (Sometimes
a clause in loans where payments only cover interest, or are not large
enough to reduce the principal in the specified term of the loan.)
Be very careful with this type of mortgage.
Buy-Down
Mortgage: A subsidy provided by someone other than the buyer,
usually the seller. This second party actually pays a part of the
mortgage, usually in times of high interest rates or difficult markets.
Qualification becomes easier as a result of financing a smaller loan.
Closing Costs: Fees you must pay at the
closing of the deal, in addition to the down payment. Some common
closing costs include points and other loan charges, escrow fees,
homeowners insurance, title insurance, property taxes, legal fees,
inspections, private mortgage insurance, prepaid loan interest, recordings,
courier fees and notary fees. Don't underestimate closing costs, as
they typically add up to be two to five percent of the purchase price.
CMA: Comparable Market Analysis. A written
analysis of comparable homes for sale, and those sold in the past
six months. This enables buyers to see if their home is fairly priced.
Conforming Loan: A loan of $207,000 or less. Conventional Mortgage:
A standard home loan through a bank or mortgage company; not insured
by the government, such as an FHA or VA loan.
Convertible Adjustable-Rate Mortgage: An ARM with the option of converting
to a fixed-rate mortgage after a specified length of time, usually
between the 13th-60th month of the loan. There is a conversion fee,
as well as an interest rate that is usually higher than regular ARM's.
Debt-To-Income Ratio: What lenders use to figure
out how much of a loan you can qualify for. Housing costs cannot exceed
a set portion of your monthly income, usually thirty to forty percent.
However, when deciding how much you can ideally spend on a house,
it is best to figure in your total bills, subtract them from your
income, then take 30-40% of that. Experts consider this a reasonable
and safe amount to spend on a home (don't forget to include interest
and other housing costs, in addition to the loan principal). Keep
in mind that what lenders say you can afford may be more than what
you are comfortable with! Down Payment: A portion of the selling price
which is paid up front, in cash, by the buyer. A larger down payment
means you'll get a better deal on the mortgage. Down payments vary,
but usually fall between five to twenty percent of the purchase price.
Due-On-Sale Clause: A clause in a mortgage
loan which gives your lending institution the right to demand payment
in full when you sell your house. FHA and VA loans are not allowed
to have this clause.
Escrow: Once you have
signed a contract with the seller of your house, all deeds, documents,
funds, etc. pertaining to the deal go into an escrow account, handled
by a lawyer, escrow firm, or title company. Their job is to handle
all the details of the transfer of title and hold your money in a
safe place while everything is going through. Read up on all the details
of this process so you will thoroughly understand what you need to
do to make it go smoothly.
Equity: The
actual value of the home, after mortgages are figured in. For example,
your home cost $250,000 and you have paid off $50,000 on a $220,000
loan. The value of your house, or the equity you have in it, would
be $80,000 (unless the house has appreciated or depreciated, according
to the state of the market).
Fannie Mae:
Federal National Mortgage Association (FNMA). Actually a private corporation
(originally a government agency) that buys and sells mortgages at
a discount. They have strict mortgage regulations, and they guarantee
the loans they sell.
FHA: The Federal Housing
Administration will back your loan if you qualify. FHA loans require
less down than conventional loans, and typically have lower interest
rates. For a detailed explanation, see the FHA editorial in our August/September
1996 issue, call New Homes for a reprint (408-244-1262), or read it
in our NewsRoom on the Internet. ( http://www.baynet.com/newhomesmapguide)
First Adjustment Period: With an ARM,
your interest rate will remian as quoted for a specified length of
time. (This could be as little as a month, which is why this initial
rate is often called the "teaser" rate.) When the date comes
when the rate may change, you have reached the first adjustment period.
Freddie Mac: Federal Home Loan Mortgage Corporation
(FHLMC). Freddie Mac, part of the Federal Home Loan Bank Board, buys
loans from banks and lenders and sells them to investors.
Ginnie Mae: A branch of the Department of Housing
and Urban Development (HUD) that guarantees FHA and VA mortgages and
provides investment opportunities in these loans.
GPM:
Graduated Payment Mortgage. An uncommon type of loan that can be great
for people whose income is sure to increase. House payments are increased
by a predetermined formula; for example payments may increase five
percent for five years, and then level off. With a GPM, you'll end
up paying less interest overall.
Homeowners Insurance:
Required insurance, covering your home and contents due to damage,
loss or fire (flood is usually not included). Bay Area residents may
also want to consider earthquake insurance.
Index:
A fluctuating economic measure of interest rates, usually dependent
on the six-month treasury bill, the 11th District Cost of Funds, or
the LIBOR. This is the reference lenders use to determine the interest
rate of your ARM, which they add to the margin (see below). You can
keep track of indexes by following the real estate section of your
local newspaper.
Interest Cap: A ceiling
on the interest rate for ARM's. This limit specifies how much the
ARM rate can fluctuate in a given time period. Jumbo: A loan larger
than a conforming loan; $208,000 and up. Life Cap: Similar to an interest
cap, the life cap is a limit to how much the interest rate can fluctuate,
but over the entire period of the loan.
Lock:
Also called a lock-in. A written agreement from the lender guaranteeing
the interest rate and the amount of points to be paid at closing to
the home buyer. This happens after an offer has been made, preventing
the lender from raising the interest rate in the time it takes for
the deal to be completed. This is a privilege, not a given, so you
may have to ask for it.
Margin: The other
factor besides the index used in determining the interest rate of
an ARM. The margin, unlike the index, does not fluctuate. Most loans
have a margin of 2.5%.
Negative Amortization:
This happens when your loan payments do not decrease your debt, either
because you are paying interest only or because your monthly payments
do not completely cover the interest. This can happen with ARM's that
do not cap the interest rate.
Payment Cap: The
limit your monthly payment can rise with an ARM, not to be confused
with an interest cap, which limits the increases in the interest rate.
Ideally, buyers would do better with ARM's that have both caps.
Percent Down: Cash, out-of-pocket, up-front
expense when buying a house. Some loans require no down payment, while
others require up to 20% of the purchase price. This amount does not
cover other fees such as closing costs, etc. so it is important that
your down payment doesn't completely tap out your savings.
Period Cap: Same as interest cap.
PITI:
Principal, interest, tax and insurance = your monthly housing expense.
PMI: Private Mortgage Insurance. With some
loans, if your down payment is less than 20% of the purchase price,
you may be required to buy this insurance, which protects your lender
if you default. This insurance is usually waived when you have made
enough payments (on time, of course) to exceed 20% equity. Premiums
are usually around .5% of the loan for the first year and generally
decrease after that.
Points: Loan origination
fees, or interest charges, that are paid up front when the deal is
closed. A "point" is one percent of the loan principal (the
original amount of the loan, not including added interest). For example,
with a $200,000 home on which you have taken out a $190,000 loan,
one point would be $1,900. The points are paid to the lender, either
by the buyer or the seller. This is a matter of negotiation and sometimes
the solution is that the buyer and seller split them. The number of
points to be paid depends on several factors, the main one being the
state of the housing market.
Prepayment Penalty:
Some lenders penalize for paying loans off early. Watch the fine print.
Principal: The amount you borrow for the actual
loan (the price of the house minus your down payment).
30/5-7
Loans: Sound complicated, but aren't. These loans are financed
on a thirty-year basis, but fall due in five or seven years. At this
time, there are three options, depending on how your mortgage was
set up:
| 1. |
You may make the balloon payment to complete the
loan, sell your home or refinance.
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| 2. |
The loan automatically resets to another fixed-rate program,
if certain requirements are met: you still own the house, you
pay the $250 roll-over fee, all your payments have been made
on time and the interest rate at the time of roll over is not
more than five percent more than the original rate (in which
case you must requalify). Also, some lenders do not allow secondary
mortgages. |
| 3. |
The loan automatically rolls over to an ARM. |
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