The Edmond Sun

August 28, 2006

The language of home loans

Trey Bowden

EDMOND — Understanding the terminology mortgage lenders use when talking with their customers can be as difficult as understanding how certain current events create fluctuations in the stock market. In an effort to make readers better mortgage shoppers, I offer the following brief glossary of mortgage terms.

• Adjustable-rate loans, also known as ARM or variable-rate loans, usually offer a lower initial interest rate than fixed-rate loans. The interest rate fluctuates during the life of the loan based on market conditions, but the loan agreement generally sets maximum and minimum rates. When interest rates rise, generally, so do your loan payments; and when interest rates fall, your monthly payments may be lowered, however, usually never below your beginning rate.

• Annual percentage rate is the cost of securing the credit expressed as a yearly rate. The APR includes the interest rate, points, broker fees and certain other credit charges the borrower is required to pay. For mortgages, this rate is reported on the Truth in Lending form.

• Conventional loans are mortgage loans other than those insured or guaranteed by a government agency such as the Federal Housing Administration, the Veterans Administration or the Rural Development Services. These are among the most popular and most-used types of mortgages.

• Escrow is the act of holding monies or documents by a neutral third party prior to closing. In Oklahoma, this service is usually provided by a title company. In some cases, where only earnest monies are involved, the real estate broker can hold these items. The most common type of escrow in this state is an account held by the lender, or loan servicer, into which a homeowner pays money for the future payment of taxes and homeowners’ insurance.

• Fixed-rate loans generally have repayment terms of 10, 15, 20 or 30 years. Both the interest rate and the monthly payments for principal and interest stay the same during the life of the loan.

• Good Faith Estimate of Closing Costs is the document prepared by the lender and presented to the borrower at loan origination. By law, this document is required to accurately present to the borrower the itemized total costs associated with the financing. This form is the best way for consumers to compare various offers from different lenders.

• The interest rate is the cost of borrowing money expressed as a percentage rate. Interest rates can change because of market conditions, therefore it is always wise for the consumer to shop and compare both interest rates and the costs associated with the loan.

• Loan origination fees are fees charged by the lender for processing the loan and are often expressed as a percentage of the loan amount.

• Lock-in refers to a written agreement guaranteeing a homebuyer a specific interest rate on a home loan provided the loan is closed within a certain period of time, such as 30, 60 or 90 days. Often, the agreement also specifies the number of points to be paid at closing.

• A mortgage is a document signed by a borrower when a home loan is made giving the lender a right to take possession of the property if the borrower fails to pay off the loan.

• Points are fees paid to the lender for the loan. Most often these fees are used to “buy down” the interest rate. One point equals 1 percent of the loan amount. Points usually are paid in cash at closing. In some cases, the money needed to pay points can be borrowed, but doing so will increase the loan amount and the total costs.

• Private mortgage insurance protects the lender against a loss if a borrower defaults on the loan. It is usually required for loans in which the down payment is less than 20 percent of the sales price or, in a refinancing, when the amount financed is greater than 80 percent of the appraised value. Payment for this insurance is added to the borrower’s monthly payment.

• Transaction, settlement or closing costs may include application fees; title examination, abstract of title, title insurance and property survey fees; fees for preparing deeds, mortgages and settlement documents; attorneys’ fees; recording fees; and notary, appraisal and credit report fees.

Under the Real Estate Settlement Procedures Act, the borrower receives a good faith estimate of closing costs at the time of application or within three days of application. The good faith estimate lists each expected cost either as an amount or a range.

(Trey Bowden is a licensed mortgage professional in Edmond.)