4. Loan Lingo

LingoDo you always want the “premium” product? Well, in the mortgage business, premium equates with “expensive,” not necessarily better. To win in the mortgage world, you must understand the basic mortgage language. So, spend a few minutes here and learn to speak another language! Rather than being in alphabetical order, these terms are presented as you will probably hear them. (Later, we even give you more lingo in our glossary).

  • MORTGAGOR: You, if you’re getting the mortgage.
  • MORTGAGEE: The lender.
  • PRE-QUALIFICATION: Generally a worthless promotional gimmick used by some lending institutions to entice you into using their product. “Pre-qualifications” are just an informal opinion a lender gives you about your ability to borrow money. You know, “Hey, we like your looks! You can afford to buy the moon, and you’ll probably qualify for our cheapest rate, too!” You’ve heard the same type of spiel from some car dealers: “1.9 percent financing!” But when it gets to contract time, the dealer raises the rate to 14 percent. Don’t waste your time with “pre-qualification.”
  • PRE-APPROVED: The real McCoy. A pre-approval, as we said earlier, tells you exactly what you need to know. Some lenders charge you hundreds of dollars for a pre-approval. Directions Credit Union charges nothing for you to be pre-approved.
  • FHA and V.A. The cousins—governmental agencies that generally help you get an easier or cheaper loan, if they like you. Here’s their definitions of “like:”

    • FHA LOANS: The Federal Housing Administration was formed to help persons with lower income buy a home. If you qualify for an FHA loan, your mortgage company may accept a smaller down payment and may have a lower interest rate, too. The FHA doesn’t make loans itself, it guarantees that you will pay your loan. This loan option is not available at Directions Credit Union.
    • V.A. MORTGAGE LOAN: If you are on active duty, or are a former spouse of a person in the military, or are a veteran—and if you have enough “eligibility,” a Veteran’s Administration (V.A.) loan can be great! V.A. mortgages don’t require any down payment, as long as the value of the house is within certain limits. This loan option is not available at Directions Credit Union.
  • CONVENTIONAL LOAN: A mortgage loan not insured by a government agency like the V.A. or the FHA. Conventional loans can be more expensive mortgage loans. What makes a mortgage “conventional”? Usually two things: You’re making at least a 5 percent down payment, and/or your mortgage is too big for the government or one of its semi-governmental agencies to insure. The maximum size for FHA and VA mortgages usually changes yearly.
  • CONFORMING MORTGAGE LOAN: You want one of these, if possible. A conforming mortgage loan falls within the loan limits set by a government-sponsored agency—either Freddie Mac or Fannie Mae. (More in a minute on them). What’s the advantage of a conforming loan? You’ll usually get a cheaper interest rate.

    • FANNIE MAE LOANS: The Federal National Mortgage Association. Fannie Mae is a quasi-governmental organization. It sets standards for loans, purchases loans, and then re-sells them to investors. Mortgage loans that follow Fannie Mae or Freddie Mac’s guidelines are usually cheaper.
    • FREDDIE MAC: The Federal Home Loan Mortgage Corporation. Freddie Mac is a lot like Fannie Mae; Freddie Mac buys and resells mortgages, and guarantees the payment of both principal and interest on those mortgages.
  • NON-CONFORMING LOAN (including JUMBO loans): A loan that exceeds the loan amount guidelines of either Fannie Mae or Freddie Mac or does not conform to their standards for some reason. As we said, the Jumbo amount varies and usually changes every year. You pay a higher rate for a jumbo or non-conforming loan. And you may have to pay more than the normal five percent down.
  • POINTS: A “point” (the singular use of the word) is simply one percent of any loan. A point may sound small, but can be very large: If you’re getting a $260,000 mortgage, a point is $2,600—certainly not hay, as they say.

    • Points are used to “buy down” interest rates. For that reason, points used like this are referred to as “discount points.” A lender might say “we’ll either give you a 5 percent loan, or we’ll give you a 4 percent loan with two points.” Of course, they aren’t giving you the points, you are paying them the points.
    • Well, the obvious fair question here: How do you know if you should take a lower rate, or pay the points? Generally speaking, if you plan to keep a loan for a long time, you are usually better off to take the lower rate and pay the points. Generally speaking, if you’re planning to sell your home in the next five years or so, your best option is to take the higher rate. Remember, mortgage interest is one of the few remaining tax deductions. To compare points and rates, use our tips.
    • How do you know what’s best in your specific circumstance, higher rates or points? Ask us. Tell us your plans for the future, and we’ll recommend the interest rate structure that will probably be best for you.
  • ASSUMABLE MORTGAGES: These are very rare and it's unlikely you can get one. An “assumable” mortgage means a person with approved credit can pay the equity in your sale price and assume your mortgage when you sell your home. This great feature is a thing of the past, unfortunately, thanks to the savings and loan debacle of the eighties. Assumable mortgages played a big role in that bleak time, and the government and lending institutions have virtually done away with assumable loans.
  • CONTINGENCY CLAUSES, or “Contingencies”: Read this section carefully. Contingencies aren’t part of the mortgage itself, but are certainly part of the loan process. Contingencies are conditions that have to be met before a contract can be enforced. For instance, you’re making an offer on a home, and you’re getting ready to write a whopping check. But you haven’t been approved for a loan yet; and you’re worried about all those funny little things with wings crawling out of the woodwork in the attic; and the seller has told you the lot next door isn’t being developed into a fireworks factory—even though a big sign on the lot says “Future Home of Rockets To The Moon”! Being a smart buyer, you make the seller put clauses in the contract that say you don’t have to honor it (and do get your deposit back) under certain circumstances—if, for example:

    • You can’t get approved for a mortgage.
    • You can’t get the interest rate you were quoted.
    • There are termites in the woodwork.
    • The fireworks factory really is being built.
    Contingency clauses can also work in your favor if you’re a seller, of course. For instance, you might insert a clause in your contract saying any buyer must be able to close the sale within 90 days or the contract is void. What’s the real message with contingency clauses? Be cautious when it comes to contingency clauses. Talk to your real estate attorney if you have questions about a specific contingency clause.
  • SURVEYS: Drawings which show the boundaries of property, or show any buildings or other “improvements” on that property. Surveys don’t tell you what a piece of property is worth, they define the size and dimensions of that piece of property.
  • APPRAISAL: Establishes the value of a property based upon comparables. The only appraisal worth anything is called a Certified Appraisal. In most states, “Certified” means the appraiser is licensed. It also means the lender will accept the appraisal as the true value of a specific piece of property. But even certified appraisals can vary, depending upon which certified appraiser is used. That’s why we pick an approved appraiser for you from a list of good appraisers.
  • IMPOUND ACCOUNTS: These accounts are established by neutral third parties in a real estate transaction to hold money for the buyer or the seller.
  • ESCROW PAYMENT or MONTHLY ESCROW PAYMENT: Money that you pay each month (over and above your principle and interest payment) that is used to pay your property insurance and property taxes. Escrow is usually only required by lenders if you make a down payment of less than 20 percent.
  • EARNEST MONEY: A deposit which shows you’re a serious buyer, and not just a “shopper.” This amount is usually held in an escrow account and credited to you at closing.
  • “FULLY INDEXED RATES”: Another really important term to understand, if you are a borrower. We’re going to tell you about Adjustable Rate Mortgages in a minute, but first you need to understand the importance of “fully indexed rates.” The fully indexed rate is an interest rate estimate that can be used to compare rates. Some lenders quote you a promotional interest rate to get your loan, but gloss over the fact that the “fully indexed” rate is dramatically higher. We won’t let this happen to you if you’re dealing with Directions Credit Union.
  • TEASER RATES: The “promotional” rate we just mentioned. These should usually be called sucker rates. Don’t pick a mortgage based on the teaser rate! The rate will go up.
  • PRORATIONS or “PRORATED FEES”: If the present owner has paid the property taxes or other fees for the year, but you’re closing on the house in the 8th month, you are generally responsible for reimbursing the seller back four months of those taxes and fees since you are assuming ownership of the property for the last four months of the year. Some prorated fees such as charges for a home security service are negotiable.
  • CLOSING COSTS: Fees the lender collects for processing a mortgage, plus title costs and prepaid items (taxes & insurance). Closing costs vary wildly, and can be paid by the buyer or the seller. If you’re smart, you obviously want the other person to pay. A caution: many real estate transactions regularly fall apart over the issue of who will pay closing costs. For instance, if you’re buying a very hot property, a seller may refuse to pay certain costs because the seller knows another buyer is in the wings. You have a perfect right to negotiate these costs, but make sure that negotiation doesn’t become a “deal breaker,” unless you intend it to be.
  • CLOSING: The day you’ve been waiting for! It’s the day you take ownership. At this point, we hope you’ll be thanking us for the good help of the FoolProof Mortgage Guide. Read more about what to expect at closing at the Directions Credit Union Mortgage website.

In the Glossary, we give you more terms. But, spend a bit of time learning the terms here and you’ll be smarter and wiser, and probably richer.

Next chapter: 5. The Many Flavors of Loans

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