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Loan Terminology
Financial Terms and Definitions
Listed below are various terms that are used by
the lending industry to describe features and conditions of loan
programs. It is important that the borrower clearly understand any
and all terms utilized to explain a particular loan program. If you
are unfamiliar with "origination fee", "capitalization" or
"compounded" as these terms are used to explain how the lender
handles the loan, you may fail to recognize some of the hidden costs
for the loan. When a fee is applied or the frequency with which
interest is applied to the account can greatly impact the final cost
of the loan. Be sure you understand every term used.
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- Additional Borrowers
Borrowers who contribute income and credit history to the
qualification process of a loan and whose names appear on all
closing documents. Each additional borrower is equally liable
for the debt and condition of the property.
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Adjustment Date
The date the interest rate changes for an adjustable rate
mortgage (ARM).
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Adjustment Period
The interval of months between the interest rate adjustment
dates for an adjustable rate mortgage (ARM).
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Adjustable Rate Mortgage (ARM)
A mortgage loan in which the interest rate is adjusted
periodically according to a pre-determined adjustment
criteria.
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Amount Financed
The Amount Financed is not the amount of the loan. It is
the requested loan amount minus the prepaid finance charge.
The Amount Financed is the amount on which the APR is based.
For example, if the borrower requests $100,000 and the Prepaid
Finance Charge totals $4,000, the Amount Financed would be
$96,000.
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Annual Percentage Rate (APR)
The actual cost of a mortgage loan expressed as a yearly
rate. The APR will be higher than the interest rate stated on
the application and note if it includes fees which are
categorized as pre-paid finance charges such as: interest,
discount points, origination fee, required mortgage insurance
and other related fees. The Truth in Lending Act requires
lenders to disclose an APR to assist the borrower in measuring
the actual cost of a loan on an annualized basis.
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Application
A form used by mortgage lenders to document necessary
information concerning the mortgage loan applicant(s).
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Appraisal
An official report created by a qualified appraiser that
establishes an opinion or estimate of property value. The
estimate of value is generally obtained by comparing homes
similar to the "subject" home within the same location or
neighborhood.
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Appraised Value
An opinion or estimate of property value provided by a
certified property appraiser. The estimate of value is
generally obtained by comparing homes similar to the "subject"
home that are within the same location or neighborhood.
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Available Cash
The amount of liquid assets (i.e. checking, savings, mutual
funds, etc.) immediately available to pay closing costs and
down payment.
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Average Interest Rate
The actual average interest rate for a combination of debts
based upon a total weighted interest rate calculation.
Utilizing each loan balance and interest rate, the calculator
determines an average interest rate for multiple debts.
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Borrower
An individual (also known as mortgagor) who receives funds
in the form of a loan with an obligation to repay the
principal with interest.
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CAPS
Safeguards on ARM loans that limit the amount a monthly
payment or interest rate may increase. An interest rate cap
limits the percent the rate can increase or decrease for the
initial and additional adjustment periods. The payment cap
limits the amount the payment can increase or decrease for
each adjustment period. An ARM loan must also have a "life of
loan" cap limiting the maximum percent the rate can increase
or decrease for the life of the loan.
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Cash Needed
The total dollar amount required for payment of closing costs
and down payment.
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Cash Out Refinance
A mortgage loan that allows the borrower to pay off an
existing debt and obtain excess money from the equity of their
home for payment of closing costs and additional funds for
personal needs (i.e., college tuition, home improvement,
remodel home, purchase automobile and etc).
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Closing
The final meeting where the sale and transfer of property
and/or loan settlement is fully executed. This meeting
generally requires the borrower(s), seller(s), lender (or
their agent) to be present. The closing includes the delivery
of a deed, signing of notes, and the collection and
disbursement of funds necessary to complete the sale and loan
transaction. Also known as Settlement.
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Closing Costs
The costs associated with purchasing a new home (or
transfer of home) and obtaining a mortgage loan. Fees are
generally assessed at closing and may include: insurance, loan
fees, title fees, transfer fees, taxes, settlement or closing
fee, survey fee, title insurance, appraisal fees, etc. The
total closing costs are approximately 5% of the mortgage loan
amount.
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Co-borrower
Borrower(s) who contribute income and credit history to the
qualification process of a loan and whose name(s) appear(s) on
all closing documents. The co-borrower is also liable for the
debt and condition of property.
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Collateral
An item of value pledged as security for a debt. The real
estate is pledged as collateral for a mortgage loan and is
bound by signing and recording a mortgage or deed of trust.
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Condominium
A structure of two or more units where the interior space
is individually owned, and the balance of the land (structure
and land) are commonly owned by the owners of each individual
unit.
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Cooperative
A structure of two or more units in which the right to
occupy a unit is obtained by the purchase of stock in the
corporation that owns the building or units.
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Cost to Refinance a Loan
The fees and total cost associated with obtaining a new
mortgage loan and refinancing an existing mortgage loan.
Generally fees are assessed at closing and may include:
insurance, title fees, transfer fees, taxes, settlement or
closing fee, survey fee, title insurance, appraisal fees, etc.
The total closing cost is typically 5% of the mortgage loan
amount.
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Credit Report
A report obtained from a credit bureau agency or company
that discloses a borrower's credit history and current credit
status.
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Debt
Consolidation Loan
A type of loan that allows the borrower to payoff all or a
portion of existing debt (including the existing mortgage
loan) from loan proceeds.
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Deed of Trust
An instrument used in many states in place of a mortgage.
The property is transferred to a trustee by the borrower (trustor),
in favor of the lender (beneficiary) and reconveyed upon
payment in full.
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Deposit
A sum of money given to the seller, real estate broker or
escrow agent with an offer to purchase real estate as evidence
of good faith. Also known as earnest money.
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Discount Points
An amount payable to the lender paid by the borrower or
seller to increase the lender's effective yield and reduce the
interest rate. One point is equal to one percent of the loan
amount. Also known as discount fee.
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Down Payment
A percent of the purchase price that is paid in cash to the
seller. The down payment is the difference between the sales
price and mortgage loan amount. Typically, the down payment is
5-20% of the purchase price.
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Earnest Money
A sum of money given to the seller, real estate broker or
escrow agent with an offer to purchase real estate as evidence
of good faith. Also known as deposit.
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Estimated Property Value
The Purchase Price or Current Market value of a specific
property.
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Equifax Credit Services
A credit reporting agency that provides a detailed report
itemizing an individual's credit history and current credit
status.
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Equity
The portion of a property's value over and above the loans
(liens) against it (i.e., value of property minus loans
against property).
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Finance Charge
The total amount of interest, prepaid finance charge and
specific required insurance premiums (if applicable) that the
borrower is expected to pay over the life of the loan.
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First Mortgage
A real estate loan with a lien (i.e., mortgage or deed of
trust) on the subject property that has priority over any
subsequently lien.
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Fixed Interest Rate
An interest rate that does not change during the entire
term or life of the loan.
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Fixed Monthly Debt
The amount of monthly payment required to be paid each
month. Sometimes referred to as "minimum monthly payment" for
credit card or revolving accounts.
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Gift Funds
Transfer of funds to assist with payment of closing costs
and/or down payment. Investors typically require that gift
funds may only be received from the borrower's parents and/or
grandparents with no intent for repayment.
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Gross Monthly Income
The total monthly income earned before taxes and any other
deductions.
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Hazard
Insurance
Insurance for a specific property that protects the insured
for loss caused by natural causes (i.e., fire, disasters and
vandalism, depending on the terms of the policy also known as
Homeowner's Insurance).
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Home Equity Loan
A type of loan that allows homeowners to acquire a loan in
addition to their original mortgage/lien using a portion or
all of the equity in their home (primary residence). A home
equity loan is a generally a second mortgage on the subject
property and may be used for any personal needs (i.e., college
education, debt consolidation, home improvement, etc).
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Homeowner's Insurance
Insurance for a specific property that protects the insured
for loss caused by natural causes (i.e., fire, disasters and
vandalism, depending on the terms of the policy also known as
Hazard Insurance).
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Installment
Loans
A loan that has a fixed (or closed-end) term (i.e., 36 months)
and fixed unchanging monthly payments. When the loan is paid
in full the borrower cannot advance additional money unlike a
revolving loan.
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Interest Rate
The percentage of an amount of money that is borrowed and
is paid for during a specific period specified in the terms of
the loan.
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Investment Property
A property designated solely as a "rental" or "leased"
property.
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Lender Name
The name of the mortgage lender that has been assigned to
review and process the loan application.
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Lien
A legal claim against a specific property as security for
payment of a debt. The mortgagor (borrower) still holds legal
title to the property, however, a lien is pledged as
collateral.
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Line of Credit (Revolving Line of Credit)
A loan with a maximum credit limit that allows the
borrower(s) to disburse funds up to the maximum credit line as
needed. Funds may be disbursed repeatedly as the principal
balance is paid down up to the maximum credit limit available.
A line of credit functions similar to a credit card and may be
accessed by writing a check or a using a debit card.
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Loan Amount
The total amount requested by the borrower to be financed.
This amount is the basis of many loan fee calculations. For
refinance loans, the loan amount will include the balance of
all loans the borrower requests to be paid off, including the
original mortgage, other personal debt and/or cash out amount.
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Loan Balance
The outstanding balance of a loan not paid in full,
excluding any accrued interest.
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Loan Product
The loan program that dictates the finance type,
amortization term and other pertinent loan functions (i.e.,
fixed or adjustable rate and 360 or 180 months).
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Loan Term
The total number of payments required to pay the loan in
full. This is also known as amortization term.
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Loan-To-Value Ratio (LTV)
The ratio between the amount of a given mortgage loan and
the lower of sales price or appraised value. To determine a
loan-to-value ratio, divide the loan amount by the sales price
or appraised value.
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Manufactured Home
A type of house that is constructed in a factory, delivered
to a property location and set on a foundation. In the past,
manufactured homes were called "mobile homes". However,
"mobile" is no longer an accurate name because fewer than five
percent of such homes are ever moved off the owner's original
site.
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Maturity
The termination or due date on which final payment of a
loan must be paid in full.
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Maximum Monthly Payment
The maximum payment a borrower may qualify for based on
their income and debt. The maximum payment is calculated by
using a debt-to-income ratio.
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Mobile Home
A type of home that is 100% constructed in a factory,
delivered to a property location and set on a lot or
foundation. A mobile home can generally be moved off of the
owner's original site.
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Monthly Housing Payment
Typically the total amount of principal, interest, taxes,
and insurance (PITI) paid each month on a mortgage loan. Many
lenders and investors limit the monthly housing payment to 28%
of the gross monthly income.
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Monthly Payment
The amount of principal and interest paid each month on a
loan. The monthly payment on a mortgage loan may also include
an escrow payment for taxes and insurance.
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Monthly Payment Savings
The total monthly payment reduction a borrower may gain by
refinancing their mortgage loan.
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Mortgage
An instrument used in some states as a claim in real estate
pledging the subject property as collateral for a mortgage
loan and terminating once the loan is paid in full.
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Mortgage Insurance (MI)
Insurance required by investors to protect the lender in
case the borrower defaults on the loan. Mortgage Insurance is
typically required for conventional loans that have a down
payment less than 20% of the purchase price. FHA and VA loans
have different insurance and guidelines. Also known as Private
Mortgage Insurance.
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Mortgagee
The lender on a mortgage loan transaction.
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Mortgagor
The borrower on a mortgage loan transaction.
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Multi Family
A term generally to distinguish a house designed for use by
more than one family.
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Note
A written agreement and promise from the borrower(s) to pay
a definite sum of money at a stated interest rate during a
specified date and term. The note contains a description of
the collateral and conditions under which the loan is to be
repaid.
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Number of People Applying for Loan
The total number of individuals who will be contributing
income and credit to the approval process. Investors may limit
the number of individuals applying for a loan.
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Number of Years at this Address
The total number of years the borrower has lived at the
current residence. Many loan programs may contain specific
criteria allowing higher Loan-to-Value or Debt-to-Income
ratios based upon years at current residence.
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Number of Years with Employer
The total number of years the borrower has been employed
with the current employer. Many loan programs may contain
specific criteria allowing higher Loan-to-Value or
Debt-to-Income ratios based upon years with current employer.
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Origination Fee
The fee charged by a lender to originate a mortgage loan.
Typically the fee is a percentage of the loan amount, such as
one percent.
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Outstanding Debt to Consolidate
The total amount of all debt the borrower desires to payoff
and consolidate into one loan and monthly payment.
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Payment
Schedule
A schedule detailing the amount and due date of payments
required to be paid over the life of the loan. The dollar
figures represent principal, interest and private mortgage
insurance (if applicable). This schedule does not reflect
payment for taxes and insurance.
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Points
An amount payable to the lender paid by the borrower or
seller to increase the lender's effective yield and reduce the
interest rate. One point is equal to one percent of the loan
amount.
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Preferred Communication Method
A process of communication used to respond to a borrowers
loan request.
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Pre-qualification
A request by a prospective loan applicant for a preliminary
determination of whether the prospective applicant would
likely qualify for credit under a lender's standards, or of
the amount of credit for which the prospective applicant
likely would qualify. Some lenders evaluate pre-qualification
requests through a procedure that is separate from the
lender's normal loan application process; others use the same
process. Pre-qualification is generally not a commitment to
lend.
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Prepaid Finance Charge
Certain charges made in connection with the loan that must
be paid upon the loan closing. These charges are defined in
Regulation Z of Federal Register and entail, but not inclusive
to: Loan Origination Fee, Discount Points, Private Mortgage
Insurance and Tax Service Fee. Some loan fees are excluded
from the Prepaid Finance Charge such as appraisal and credit
report fees.
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Primary Borrower
An individual who is listed first on the mortgage loan
application and is considered to be the primary borrower. Some
lenders allow a non-occupying co-borrower or co-signor to be
on the application. In this case, the borrower occupying the
property will need to be the primary borrower.
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Primary Home
A property that the owner intends to occupy and will be
their primary residence.
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Primary Residence
A home which the borrower intends to occupy as the
principal residence.
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Principal and Interest (PI)
A portion of the monthly payment that is applied toward the
loan balance and accrued interest. Payment for property taxes
and insurance is considered PITI (principal, interest, taxes
and insurance).
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Principal, Interest, Taxes and Insurance (PITI)
The monthly payment that is applied toward the loan
balance, accrued interest and escrow account. Principal,
interest, taxes and insurance are the four major components of
a regular monthly mortgage payment. Payment for principal and
interest is considered PI (principal and interest).
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Principal Balance
The outstanding balance due on a debt, excluding any
accrued interest or other fees.
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Private Mortgage Insurance (PMI)
Insurance required by investors to protect the lender in
case the borrower defaults on the loan. Mortgage Insurance is
typically required for conventional loans that have a down
payment less than 20% of the purchase price. FHA and VA loans
have different insurance and guidelines. Also known as
Mortgage Insurance.
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Proceeds from Sale of Current Home
The total funds remaining from the sale and transfer of a
current home. The proceeds are calculated by subtracting all
settlement fees and lien payoffs from the sales price
(purchase price). Many borrowers use the proceeds from the
sale of the current home as down payment and/or payment of
closing costs for the purchase of a new home.
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Product Type
The loan type typically details the purpose of the loan
(i.e., purchase new home, refinance existing home, home
equity, debt consolidation and second mortgage). Many loan
programs may contain specific criteria allowing only certain
loan types.
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Property Class
A description of the structure of the property determining
whether it is uses as a Single (one) Family Home, Multi Family
Home (2-4), Condominium, Town Home, Manufactured or Mobile
Home and Cooperative Housing.
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Property Taxes
A tax collected on real estate property by local, state
and/or federal government. The amount of tax is determined by
the value of the property.
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Property Type
A description of the property that determines whether the
property will be used as a Primary Residence Home, Investment
Property or Second Home.
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Property Use
A description of the property that determines whether the
property will be used as a Primary Residence Home, Investment
Property or Second Home.
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Purchase Price
The amount of money paid for a specific property and is
based upon a written agreement (purchase agreement) between
the seller and buyer. Also known as sales price.
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Qualify
A process of preparing a borrower for a mortgage loan by
analyzing their financial data and comparing to loan program
criteria to determine the best-fit program based upon
loan-to-value ratio, debt-to-income ratio and credit
information (if applicable).
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Rate Type
A factor that determines the payment structure and whether
the rate may adjust during the life of the loan. Generally
fixed or adjustable (ARM).
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Refinance
The process of obtaining a new mortgage loan to pay off the
existing debt from loan proceeds using the same property as
collateral. This type of loan is generally requested to obtain
a lower interest rate and/or reduce payment or term.
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Revolving Loan
A loan with a maximum credit limit that provides the
borrower with the ability to disburse funds up to the maximum
credit line as needed. The line of credit can be accessed
repeatedly as the balance is paid down. A revolving loan
functions similar to a credit card and may be accessed by
writing a check or a using a debit card.
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Sales Price
The amount of money paid for a specific property, the sales
price is based upon a written agreement between the seller and
buyer (also known as purchase price).
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Second Home
A property designated as a second residence or vacation home
and is livable year round. The property owner generally
resides at different property referred to as "Primary Home."
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Security
Real estate property pledged as collateral to secure the
payment of a debt, most commonly used in mortgage loan
transactions.
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Settlement
The final meeting where the sale and transfer of property
and/or loan closing is fully executed. This meeting generally
requires the borrower(s), seller(s), lender (or their agent)
to be present. The closing includes the delivery of a deed,
signing of notes, and the collection and disbursement of funds
necessary to complete the sale and loan transaction (also
known as closing).
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Single Family
A term generally to distinguish a house designed for use by
one family.
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Specific Monthly Payment
A desired monthly payment or pre-determined monthly
payment.
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State Property is Located
The actual state of which the property is located.
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Student Loans
A government affirmed loan obtained to finance the cost of
tuition for approved colleges and universities.
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Survey
The measurement of the boundaries of a parcel of land
documented by a registered surveyor.
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Term
A period of time (usually months) that a loan must be
repaid.
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Title
The evidence of ownership and rights an individual has to a
specific property/real estate.
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Title Insurance
Insurance obtained from a title insurance company that
insures the purchaser, lender (mortgagee), or other agent from
any loss caused by defects of title on the subject
property/real estate.
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Total of Payments
The Total of Payments represents the sum of all payments
made toward principal, interest and mortgage insurance (if
applicable) for the life of the loan.
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Total Fixed Monthly Debt
The total monthly sum of all monthly loan payments for all
borrowers. This total should only include the minimum required
payment and not the actual payment made (if excess payment is
made).
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Transfer Tax
State or local tax on the transfer of title (ownership)
when the title passes from one owner to another.
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Type of Property
A description of the structure of the property determining
whether it is uses as a Single (one) Family Home, Multi Family
Home (2-4), Condominium, Town Home, Manufactured or Mobile
Home and Cooperative Housing.
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