The common terms used to describe a mortgage include the “creditor”, the “borrower” and the “mortgage broker”. It may be self-explanatory as to what these terms mean, but there are other terms related to a mortgage that a homeowner may not be fully familiar with. Let’s cover some of them here:
The lender is the financial institution, usually a bank, that provides the money in the form of a loan equal to the mortgage. The creditor is also sometimes referred to as the mortgagee or lender.
The debtor is the person or party who owes the mortgage or loan. They may be referred to as mortgage lenders.
Many houses are owned by more than one person, e.g. a married couple, or sometimes two close friends buy a house together, or a child with its parents, and so on. If this is the case, both people become the debtor of this loan and not just the owner of the property.
In other words, be sure to have your name on a home’s deed or title, as this also makes you liable for the mortgage or loan associated with that home.
Mortgage Broker, Financial Advisor
Mortgages are not always easy to come by, but due to the demand for home ownership in most countries, there are many financial institutions that offer them. Banks, credit unions, savings banks, and other institutions may offer mortgages. A mortgage broker can be used by the potential borrower to find the best mortgage with the lowest interest rate for them; The mortgage broker also acts as the lender’s representative to find people willing to take on those mortgages, do the paperwork, etc.
There are usually other parties involved in getting or obtaining a mortgage, from lawyers to financial advisors. Because a home mortgage is typically the largest debt a person will have in their lifetime, they often seek legal and financial advice to make the right decision. A financial advisor is someone who is very knowledgeable about your own needs, income, long-term goals, etc. and can then give you the best advice on your borrowing needs.
If the debtor cannot or does not meet the financial obligations under the mortgage, the property can be foreclosed on, which means that the creditor will seize the property to cover the remaining cost of the loan.
Typically, a foreclosed home is auctioned off and that sale price is applied to the outstanding amount on the mortgage; The debtor can still be held liable for the balance if the property was sold for less than the outstanding balance of the mortgage.
Suppose a person owes $50,000 on their mortgage and their home is foreclosed on. The house sells for just $45,000 at auction. The debtor is still responsible for the remaining balance of $5,000.
Most banks and financial institutions will try to avoid foreclosure on their debtors’ property whenever possible. Not only do you run the risk of not being able to sell the house at any price, but there are also additional costs and risks if the house is vacated by the previous owners. These include vandalism, squatters (people entering vacant land or houses and staying there until they are forcibly removed), city fines for unkempt yards, and so on.
Annual Percentage Rate (APR)
The APR is not to 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 B. Points, processing fees and mortgage insurance premiums (if applicable).
If there are no other costs apart from the interest rate when borrowing, the annual percentage rate corresponds to the interest rate.
The break-even point is the amount of time it takes to recoup the cost of refinancing a mortgage. It is calculated by dividing the acquisition costs for the refinancing by the difference between the old and the 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 on your new mortgage, you will break even after 17 months (17 months x $300 per month ). month = $5,100).
This refers to an adjustable rate mortgage; a mortgage that allows the lender to adjust their interest rate periodically.
A mortgage where the interest rate does not change over the life of the loan.
ARMs have fluctuating interest rates, but those fluctuations are usually limited by law to a certain amount.
These limits may relate to how much the Loan can be adjusted over a six month period, a year and over the life of the Loan and are referred to as “Caps”.
A number used to calculate the interest rate on an ARM. The index is generally a published number or percentage, such as B. the average interest rate or the yield on US government bonds. A margin is added to the index to determine the interest rate charged on the ARM.
Because the index can vary by ARM, many people considering refinancing would do well to keep an eye on the standard interest rate set by the federal government, which is what lending institutions typically use to calculate this index.
The interest rate that banks charge their preferred customers. Changes in the base rate affect changes in other interest rates, including mortgage rates.
A homeowner’s financial interest in or value of a property. Equity is the difference between the market value of the property and the amount owed on the mortgage and other liens, if that is greater.
In other words, if the fair market value of the house is $200,000 and your mortgage (and other liens, if any) is only $150,000, then the house has $50,000 in equity.
Loans secured by a specific property, granted after purchase against the “equity” of the property.
Using the above illustration of a home with $50,000 equity, a homeowner can borrow up to that amount and use the home as collateral for that loan. A lending institution knows that if the homeowner defaults on the loan, they can seize the property and sell it for at least that amount in order to recover their loan amount.
The gradual repayment of a mortgage loan, usually through monthly installments of principal and interest.
An amortization table shows the payment amount broken down into interest, principal and balance for the entire term of the loan. These charts are useful because a mortgage payment does not accrue the same amount of principal and interest month after month, even if the payment amount is the same. This is often a difficult concept to grasp for those not in the real estate or banking business, so an amortization table that outlines how each payment will be applied to the debt over the life of the loan can be very helpful.
Cash Out Refinancing
When a borrower refinances their mortgage for more than the current loan balance with the intention of withdrawing money for personal use, this is known as a “cash-out refinance.” In other words, the mortgage isn’t just for the home, it’s also funding an additional amount of money.
An opinion of the fair market value of a property based on a valuer’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.
The increase in value of a property due to changes in market conditions, inflation or other causes.
A depreciation 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 crucial factor in the home mortgage. When refinancing, it’s important to understand that your home may have appreciated or decreased in value since the original or first mortgage was obtained.
An agreement in which the lender guarantees a specific interest rate for a specific period of time at a specific price.
The period of time that the lender has guaranteed a borrower an interest rate.
This is a different concept than a fixed rate mortgage because the lock-up period on a mortgage can be temporary rather than over the life of the loan.
As we’ve said before, many of these terms may already be familiar to you, but it doesn’t hurt to review them and see how they all relate to your mortgage and the refinancing process.
Now that you have these basic concepts related to a mortgage and the lending process in mind, let’s discuss the process of refinancing in more detail.