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Adjustable-rate loans,
also known as variable-rate loans, usually offer a lower initial interest
rate than fixed-rate loans. The interest rate fluctuates over the life of
the loan based on market conditions, but the loan agreement generally sets
maximum and minimum rates. When interest rates rise, generally so do your
loan payments; and when interest rates fall, your monthly payments may be
lowered.
Annual percentage rate (APR) is
the cost of credit expressed as a yearly rate. The APR includes the
interest rate, points, broker fees, and certain other credit charges that
the borrower is required to pay.
Conventional loans are mortgage loans
other than those insured or guaranteed by a government agency such as the
FHA (Federal Housing Administration), the VA (Veterans Administration),
or the Rural Development Services (formerly know as Farmers Home
Administration or FmHA).
Escrow is the holding of money
or documents by a neutral third party prior to closing. It can also be an
account held by the lender (or servicer) into whom a homeowner pays money
for taxes and insurance.
Fixed-rate loans generally have
repayment terms of 15, 20, or 30 years. Both the interest rate and the
monthly payments (for principal and interest) stay the same during the
life of the loan.
The interest rate is the cost of borrowing money
expressed as a percentage rate. Interest rates can change because of
market conditions.
Loan origination fees
are fees charged by the lender for processing the loan and are often
expressed as a percentage of the loan amount.
Lock-in refers to a written
agreement guaranteeing a home buyer a specific interest rate on a home
loan provided that the loan is closed within a certain period of time,
such as 60 or 90 days. Often the agreement also specifies the number of
points to be paid at closing.
A mortgage is a document signed by a borrower when a home
loan is made that gives the lender a right to take possession of the
property if the borrower fails to pay off the loan.
Overages are the difference
between the lowest available price and any higher price that the home
buyer agrees to pay for the loan. Loan officers and brokers are often
allowed to keep some or all of this difference as extra compensation.
Points are fees paid to the
lender for the loan. One point equals 1 percent of the loan amount.
Points are usually paid in cash at closing. In some cases, the money
needed to pay points can be borrowed, but doing so will increase the loan
amount and the total costs.
Private mortgage insurance (PMI)
protects the lender against a loss if a borrower defaults on the loan. It
is usually required for loans in which the down payment is less than 20 percent
of the sales price or, in a refinancing, when the amount financed is
greater than 80 percent of the appraised value.
Thrift institution is a general term
for savings banks and savings and loan associations.
Transaction, settlement, or closing costs
may include application fees; title examination, abstract of title, title
insurance, and property survey fees; fees for preparing deeds, mortgages,
and settlement documents; attorneys’ fees; recording fees; and notary,
appraisal, and credit report fees. Under the Real Estate Settlement
Procedures Act, the borrower receives a good faith estimate of closing
costs at the time of application or within three days of application. The
good faith estimate lists each expected cost either as an amount or a
range.
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