Common terms used to describe a mortgage involve “creditor,” “debtor,” and “mortgage broker.” It may be self-explanatory what those terms mean, but there are also other terms related to a mortgage that a homeowner may not be completely familiar with. We are going to cover some of them here:
Creditor
The creditor is the financial institution, usually a bank, that provides the money in the form of a loan for the amount of the mortgage. The creditor is sometimes referred to as a mortgagee or lender.
debtor
The debtor is the person or party who owes the mortgage or loan. They may be referred to as the mortgagor.
Many houses are owned by more than one person, such as husband and wife, or sometimes two close friends buy a house together, or a child with his parents, and so on. If this is the case, both people become borrowers on that loan, and not just owners of the property.
In other words, be careful not to put your name on the deed or title to any home, as this also makes you legally responsible for the mortgage or loan attached to that home.
Mortgage broker, financial advisor
Mortgages are not always easy to get, however, due to the demand for housing in most countries, there are many financial institutions that offer them. Banks, credit unions, savings and loans, and other types of institutions may offer mortgages. The potential debtor can use a mortgage broker to find the best mortgage at the lowest interest rate for them; The mortgage broker also acts as an agent for the lender to find people willing to take on these mortgages, to handle the paperwork, etc.
There are usually other parties involved in closing or obtaining a mortgage, from attorneys to financial advisors. Because a mortgage on a private home is often the largest debt anyone will have in their lifetime, they often seek whatever legal and financial advice is available to make the right decision. A financial advisor is someone who can get acquainted with her own particular needs, income, long-term goals, etc., and then give her the best advice on what her loan needs may be.
Mortgage’s trial
When the debtor cannot or does not meet the financial obligations of the mortgage, the property can be foreclosed, which means that the creditor puts a lien on the property to recover the remaining cost of the loan.
Typically, a foreclosed home will be sold at auction and that sale price will be applied to the outstanding amount of the mortgage; the debtor may still be liable for the remaining amount if the property was sold for less than the outstanding mortgage balance.
For example, suppose a person still owes $50,000 on their mortgage and their home is foreclosed on. At auction, the house is selling for just $45,000. The debtor remains responsible for the remaining difference of $5,000.
Most banks and financial institutions will try to prevent foreclosure on any of their debtors’ properties if possible. Not only do they run the risk of not being able to sell the house at auction at any price, but additional costs and risks are incurred when the previous owners vacate the house. This includes vandalism, squatters (people who invade vacant lots or vacant houses and stay there until forcibly evicted), fines from cities for neglected yards, etc.
Annual Percentage Rate (APR)
The APR should not be confused with the interest rate on a mortgage.
The APR is the interest rate on a loan plus the additional costs of obtaining the loan, such as points, origination fees, and mortgage insurance premiums (if applicable).
If there were no costs involved in obtaining a loan other than the interest rate, then the APR would be equal to the interest rate.
Breakeven
The break-even point is the time it will take to recover the costs incurred to refinance a mortgage. It is calculated by dividing the amount of closing costs for refinancing by the difference between the old and new monthly payment.
For example, if it costs you $5,000 in fees, penalties, etc. to refinance your mortgage, but you save $300 per month on your payments with your new mortgage, you break even after 17 months (17 months x $300 per month = $5,100).
RMA
This refers to an adjustable rate mortgage; a mortgage that allows the lender to adjust your interest rate periodically.
fixed rate mortgage
A mortgage in which the interest rate does not change during the term of the loan.
layer
ARMs have fluctuating interest rates, but those fluctuations are generally limited by law to a certain amount.
These limitations may apply to how much the loan can be adjusted during a six-month period, an annual period, and over the life of the loan, and are called “limits.”
Index
Number used to calculate the interest rate on an ARM. The index is usually a published number or percentage, such as the average interest rate or yield on US Treasury bills. A margin is added to the index to determine the interest rate that will be charged on the ARM.
Since the rate can vary with ARMs, many people considering refinancing do well to stay aware of the standard interest rate set by the federal government, as it is often used by lenders to calculate that rate.
Prime interest rate
The interest rate that banks charge their preferred customers. Changes in the prime rate influence changes in other rates, including mortgage interest rates.
Equity
The financial interest of an owner or the value of a property. Equity is the difference between the fair market value of the property and the amount still owed on your mortgage and other liens, if that value is greater.
In other words, if the fair market value of the home is $200,000 and your mortgage (and other liens, if any) is only $150,000, then the home has $50,000 in equity.
Home Equity Loan
Loans secured by a specific property that were made against the “equity” of the property after it was purchased.
Using the illustration above of a house that has $50,000 in equity, a homeowner can obtain a loan for that amount, using the house as collateral for that loan. A lending institution knows that if the owner defaults on the loan, he can seize the property and sell it for at least that amount, recouping the loan amount.
Amortization
The gradual payment of a mortgage loan, generally in monthly installments of principal and interest.
An amortization table shows the payment amount broken down by interest, principal, and unpaid balance over the entire term of the loan. These tables are helpful because when a mortgage payment is made, the same amount of principal and interest is not applied month after month, even when the payment amount is the same. This is often a difficult concept for those not in the real estate or banking business to understand, so an amortization table that explains how each payment is applied to debt over the life of the loan can be very helpful.
cash refinancing
When a borrower refinances their mortgage for more than the current loan balance with the intention of withdrawing money for personal use, it is called a “cash refinance.” In other words, the mortgage is not just for the house itself, but an additional amount of money is being financed as well.
Appraised value
An opinion of a property’s fair market value, based on an appraiser’s knowledge, experience, and analysis of the property. The appraised value of the home is a key factor in how much the home can or will be mortgaged.
Appreciation
The increase in the value of a property due to changes in market conditions, inflation or other causes.
Depreciation
A decrease in property value; the opposite of appreciation.
Appreciation and depreciation are important concepts to remember; As we have just commented, the appraised value of the home is a determining factor in the home mortgage. When refinancing, it’s important to understand that the value of your home may have appreciated or depreciated since the original or first mortgage was obtained.
To close
An agreement in which the lender guarantees a specified interest rate for a specified period of time at a specified cost.
lockout period
The period of time during which the lender has guaranteed an interest rate to a borrower.
This is a different concept than a fixed-rate mortgage, as a mortgage’s lock-in period may be temporary rather than for the life of the loan.
As we said earlier, you may already be familiar with many of these terms, but it doesn’t hurt to review them and see how they relate to your mortgage and the refinancing process.
So now that you have these basic terms in mind when it comes to a mortgage and the loan process, let’s take a closer look at the refinancing process.
