Common terms used to describe a mortgage involve the “creditor,” the “debtor,” and the “mortgage broker.” It may be self-explanatory what those terms mean, but there are other mortgage-related terms that the homeowner may not be completely familiar with. Let’s 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. Sometimes the creditor is referred to as a mortgagee or lender.
Debtor
The debtor is the person or party who owes the mortgage or loan. They can be called mortgage debtors.
Many houses are owned by more than one person, like a husband and wife, or sometimes two close friends buy a house together, or a child with his parents, etc. If this is the case, both people become debtors on that loan and not just the owners of the property.
In other words, be careful that your name appears on the deed or title to any home, as this also makes you legally liable for the mortgage or loan attached to that home.
Mortgage broker, financial advisor
Mortgages are not always easy to come by, however, due to the demand for homes 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 prospective borrower 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, handle the paperwork, etc.
Typically, there are other parties involved in closing or obtaining a mortgage, from lawyers to financial advisers. Because a mortgage for a private home is often the largest debt a person 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 to know your own particular needs, income, long-term goals, etc., and then give you the best advice on what your 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 seizes 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 in foreclosure. At auction, the home 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 avoid foreclosure on any of their debtors’ properties, if possible. Not only are they at risk of not being able to sell the home at auction for any price, but there are also additional costs and risks incurred when the home is vacated by the previous owners. This includes vandalism, squatters (people who illegally enter vacant lots or vacant homes and remain there until forcibly removed), city fines 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, the APR would equal the interest rate.
Breakeven
The breakeven point is the time it will take to recover the costs incurred to refinance a mortgage. It is calculated by dividing the amount of the closing costs for the refinance by the difference between the old monthly payment and the new one.
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, the breakeven point is after 17 months (17 months x $ 300 per month = $ 5,100).
ARM
This refers to an adjustable rate mortgage; a mortgage that allows the lender to adjust its interest rate periodically.
Fixed rate mortgage
A mortgage in which the interest rate does not change during the term of the loan.
Cap
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 over a six-month period, an annual period, and during the life of the loan, and are called “maximum limits.”
Index
Number used to calculate the interest rate on an ARM. The index is generally a published number or percentage, such as the average interest rate or the yield on US Treasury bills.A margin is added to the index to determine the interest rate to be charged on the ARM.
Since the index can vary with ARMs, many people considering refinancing do well to be aware of the standard interest rate set by the federal government, as it is commonly used by lenders to calculate that index.
Prime rate
The interest rate that banks charge their preferred customers. Changes in the prime rate influence changes in other rates, including mortgage interest rates.
Capital
The financial interest of an owner or the value of a property. Equity is the difference between the property’s fair market value and the amount still owed on your mortgage and other bonds, whichever is greater.
In other words, if the fair market value of the home is $ 200,000 and your mortgage (and other ties, if applicable) is only $ 150,000, then the home has a net worth of $ 50,000.
Home equity loan
Loans secured by a specific property that were made against the “equity” of the property after purchase.
Using the illustration above of a home that has $ 50,000 in equity, a homeowner can borrow up to that amount, using the home as collateral for that loan. A lending institution knows that if the homeowner defaults on the loan, they can sixteen the property and sell it for at least that amount, recovering the loan amount.
Amortization
The gradual repayment of a mortgage loan, generally through monthly installments of principal and interest.
An amortization table shows the payment amount broken down by interest, principal, and unpaid balance for the entire term of the loan. These tables are useful because when a mortgage payment is made, the same amount is not applied to principal and interest 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 withdrawal refinancing
When a borrower refinances his mortgage for an amount greater 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 simply for the house itself, but an additional amount of money is also being financed.
Appraised value
An opinion of the fair market value of a property, based on the knowledge, experience, and analysis of the property by an appraiser. 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 the value of the property; the opposite of appreciation.
Appreciation and depreciation are important concepts to remember; As we just mentioned, the appraised value of the home is a determining factor in the home mortgage. When refinancing, it is important to understand that your home may have appreciated or depreciated since the original or first mortgage was obtained.
Shut down
An agreement in which the lender guarantees a specific 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 the lock-in period for a mortgage may be temporary and not 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.