Posts Tagged ‘mortgage’
Mortgage Jargon in Simple Terms and Definitions
Mortgage Term Glossary
When purchasing a property for the first time, the information that you receive is a little overwhelming. The terminology is foreign and not made for easy reading. But, these are terms that you should know. These terms and conditions are essential to understand if you are purchasing a new home. But, there is not a dictionary out there, so I will lay out the most common terms and what they mean for you here.
Adjustable rate mortgage: This is a mortgage term that is used commonly. The mortgage with adjustable rate mortgage itself periodically based on the current percentage rate. It does it once in three years or five years. This is an outstanding mortgage option if you plan to sell your home before the 5 year limit.
Amortization: This is the basic schedule of payments that you will make on the mortgage over the term of the loan.
Credit Score: This is the number of your risk level and how well you pay your bills. It shows the lenders your credit worthiness as the ability to pay off the initial loan.
Equity: This is a term used to value the current property. To calculate the equity of a home subtract the cash value from outstanding loan balance and it will be the worth of the home. If, you make extra mortgage payments a year your equity will grow substantially.
Fixed Rate Mortgage: Just as it sounds this is a mortgage that has a fixed payment from month to month over the lifetime of the loan. The payments do not rise or fall like with adjustable rate mortgages.
Home equity loan: this is a loan that people take out on top of their mortgage payment. The home owner will borrow against the current equity in the home for things like school or medical bills.
Home equity line of credit: Is the same as a home equity loan but is processed when the home owner needs it using a debit card or check book to withdrawal money.
Interest-only mortgage: Buyers pay on the interest for a set time limit. After it expires payments increase to start paying off the principal amount on the loan.
Loan origination fees: these are costs associated with finalizing and setting up the loan referred to as “points”
Mortgage insurance: This is typically given for the first time home buyers in that once a loan is originated if something were to happen the lender would not loose and money due to a homeowner not paying. So it is a protection for the lender in giving you a loan.
Mortgage points: this is the lenders fee for giving you money for a loan. Usually equal to 1 percent or less and is due at closing.
PITI: Pronounced “pity,” it is an acronym for principal, interest, taxes and insurance, the four components of a mortgage payment.
Prepayment penalty: this is a fee the lender will include in the contract usually for 30-90 days due to the lender wanting to receive some interest payment from the loan that was originated.
Principal: This is the actual outstanding loan balance on the loan that you received. If, you make payments towards the principal of your loan you can save money on the interest payments you will end up owing.
Refinancing: This is when you want to re borrowed money from the same or to a different lender to pay off one mortgage and get another with a better interest rate.
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Factoring Closing Costs
Closing costs vary widely around the country, as well as from lender to lender. And because buyers and sellers are free to negotiate certain fees, there is significant latitude there as well. For this reason, you should always do your due diligence before making any offers so you can anticipate the closing costs and negotiate with the seller from a secure base of knowledge.
As the buyer you can generally plan to spend an additional 3% to 5% of the loan amount in closing costs. On a $100,000 mortgage, for example, they would be $3,000 to $5,000.
In higher‐tax areas, 5% to 6% is more realistic. The exact figure depends upon the location of the property. Consider any commissions or prepayment penalties that need to be paid. The fees you pay for a closing also vary depending on who is involved and the type of closing it is. A closing could involve a single mortgage, or it could involve a first and a second mortgage.
Closing costs fall into four general categories: loan costs, title fees, government fees, and third party fees. A final factor contributing to your closing costs is the state where the property is located. A 2008 Bankrate.com survey calculated the average origination and title fees on a $200,000 mortgage in each state’s largest cities. They found that the highest costs ranged from $3,500 to $4,000. New York City is the most expensive, with average closing costs running at a$4,015. The costs in the least expensive locations ranged from $2,600 to $2,900. North Carolina is the least expensive in the country, with closing costs at $2,650. It is followed by Kansas, Missouri, Maine and South Dakota.
According to the survey the national average for closing costs is $3,118. You can find the average closing costs for your state by going to Bankrate.com, though it is important to remember that it is only a guide. The specific closing costs for a property can vary depending on multiple factors, making due diligence a must.
What is a REMIC?
A Real Estate Mortgage Investment Conduit, or REMIC, is a kind of special purpose entity, or SPE, made up of various mortgage loans for the purpose of issuing mortgage-backed securities, or MBS.
Are you confused yet? Let’s break it down.
A REMIC is a legal entity – a limited partnership or a limited liability company – created for no other purpose than to pool mortgage loans together. (This narrow purpose is what makes it a “special purpose entity” or “special purpose vehicle.”) Once the REMIC has invested in selected family, commercial, second, or other mortgages, it issues securities (hence mortgage-backed securities). Each security issued represents a portion of all the combined mortgages, as opposed to each security representing an individual mortgage.
To make it even simpler – and maybe even oversimplify – a REMIC company is created for the sole purpose of buying mortgages. The company buys the mortgages, knowing they will see a return on their investment as people pay back their mortgages. This company takes it a step further by allowing people to invest in their company through securities – securities made up of portions of each mortgage.
There are several advantages to REMICs. Because they are made up of many different mortgages, if some of the mortgages default it may lessen the value of the security, but being broken up to include lots of mortgages makes it more diverse and more secure. The actual REMIC also doesn’t have to pay federal taxes, although individual investors are required to pay taxes on any income.
One disadvantage to a REMIC is that once the mortgages are bought and pooled, it’s not easy to add or remove individual mortgages. This means if one or two mortgages bundled in the REMIC aren’t doing well, investors are stuck with them. The other major disadvantage to a REMIC if all the mortgages default (like what’s happening with the current real estate market) then the REMIC loses almost all of its value.
So while a REMIC may be a good investment, it’s important to take into account current market trends.
