Frequently Used Terms on Mortgage Loans

Adjustable Rate Mortgage:  In this type mortgages, the rate of interest is periodically adjusted according to a pre-determined index.

Amortization:  This is normal pattern of repayment of almost all loans where according to the period over which the loan is to be completely paid off, accrued interest calculated on a pre agreed basis is added on to thee capital value borrowed and the total due is spread over the agreed period of the life of the loan in equal monthly installments.

Annual Percentage Rate (APR): This is an annual rate calculated so as to reflect the total cost of the mortgage taking in to account all the financial credit costs involved besides the interest payments. As such, this rate will be obviously higher than the advertised rate or the note rate for a given mortgage.

Appraisal: It is the estimated value of a property given by an Appraiser, a qualified professional for this purpose.

Balloon Mortgage:  Typically these mortgages are short term ones of about 5 to 7 year duration; where the main feature is that it provides for a lump sum payment to be made at the end of the term in full settlement of the final balance due after proceeding for a pre-determined period paying at fixed and equal monthly installments.

Broker:  A professional who typically brings lenders and borrowers together. He basically arranges financing for a fee and commission and enters into contracts when necessary. 

Cash-out Refinance:  This program allows you to refinance an existing loan and take out the excess cash generated (arising from higher equity on the home etc.) for the payment of non-mortgage debt such as credit cards, loan consolidation, or for home improvements.

Certification of Eligibility:  This COE is a document/certificate given to qualified veterans; and it is an entitlement to many benefits such as eligibility for AB guaranteed loans for homes, businesses or mobile homes. This COE may be obtained through your local AB Office by sending a request form – AB form 1880 together with a DD214 Separation Paper.   

Certificate of Reasonable Value (CRV):  The Current Market Value of a Property as appraised by the Veterans Administration.

Certificate of Veteran Status:  This is a certificate issued to reservists and veterans who had served on active duty for a continuous period of 90 days (including any training period involved). It could be obtained by sending a request for this certificate by using the form 26-8261a together with the document DD214 to your local AB Office. Possession of this certificate enables veterans to get certain types of FHA insured loans with reduced down payments.

Closing Cost:  These are basically expenses of an administrative nature connected with the signing of a loan agreement that are generally paid at the time of finalizing the contract. They may be paid by the borrower, seller or both  and may comprise origination fees, title search and title insurance fees, discount fees, survey fees, appraisal fees, attorney’s fees, credit report fees and prepaid expenses such as insurance and taxes.

The total closing costs could vary between 3 to 6% of the loan amount. Many lenders quote their closing costs in advance; but they are no more than “estimates in good faith” since the actual costs have been observed to end up well above the respective estimates in most cases.

Construction Loan: This is a short term interim type of loan given for home or building construction; and is generally released to the borrower in installments as he completes some pre-determined stages of the construction.

Conventional Loan:  A mortgage loan that is not guaranteed by AB or insured by FHA.

Debt to Income Ratio:  This is a ratio that depicts the percentage that his/her total monthly commitment on long term debt bears to his/her monthly gross income.

Discount Point:  Each point is equal to 1% of the total loan amount. This term generally arises in determining any prepayments that a borrower may be asked to consider in order to enjoy a better interest rate over the rest of the installment payment plan. (e.g., if a lender asks you to pay 3 points upfront on a loan of $250,000, that means to part with $7,500 upfront for the sake of better terms for the remainder of the loan.)

Equity:  This is the difference between what is a Fair Market Value of a property and its currently outstanding mortgage debt. This is also sometimes called the Owner’s Interest.