Glossary

A collection of textual glosses or of specialized terms with their meanings

A list (as of bibliographical information or citations to a body of literature) arranged usually in alphabetical order of some specified datum (such as author, subject, or keyword).

The lender fees that are charged for the closing of a loan.

A one-time fee you pay your lender to lower your interest rate. Points are purchased at the sale of a home or when you refinance a home.

An appraisal is a valuation of property, such as real estate, a business, collectible, or an antique, by the estimate of an authorized person. The authorized appraiser must have a designation from a regulatory body governing the jurisdiction of the appraiser. Appraisals are typically used for insurance and taxation purposes or to determine a possible selling price for an item or property.

• An appraisal is an assessment of the fair market value of a property, business, antique, or even a collectible.
• Appraisals are used to estimate the value of items that are infrequently traded and are unique.
• The authorized appraiser must have a designation from a regulatory body governing the jurisdiction of the appraiser.
• Appraisals can be done for many reasons such as tax purposes when valuing charitable donations.
• Home appraisals can positively or negatively impact the sale of a house or property.

Appraisals help banks and other lenders avoid losses on a loan.

A home inspection is an examination of the condition and safety of a piece of real estate, often conducted when the home is being sold. A qualified home inspector will assess the heating and cooling system, water and sewage systems, other plumbing, and electrical work, and look for any potential fire or safety hazards. In addition, the home inspector may check for evidence of insects, water, fire damage, or any other issue that can affect the property’s value.

• A home inspection examines a property’s safety and current condition.
• A buyer typically arranges and pays for a home inspection and—depending on its findings—may choose to move on to closing, renegotiate the sale price, request repairs, or back out of the deal.
• A home inspection is not the same as a home appraisal, which is required and scheduled by a lender to determine the value of a property for which a buyer is seeking a mortgage.
• Before buying a home, you should have it inspected. Waiving an inspection may be a risky decision and one that could prove costly later.

A loan estimate is a three-page form that presents home loan information in an easy-to-read format, complete with explanations. This standardization not only makes the information easy to digest; it also makes it easy to determine what the costs are. You’ll get a loan estimate within three business days of applying for a mortgage unless you don’t meet the lender’s basic qualifications and your application is rejected. The only fee you may have to pay to get a loan estimate is a credit report fee.

Page 1- Begins with Basic Information:

• Lender’s name and address
• Applicant’s name and address
• Property address and sale price
• Loan term, type, and purpose
• Loan ID number
• Loan estimate date
• Rate lock information

Page 2—Itemized Mortgage Costs

The loan estimate’s second page itemizes the loan’s closing costs and shows how much cash you’ll need to finalize the loan.

1. Origination Charges
2. Services You Cannot Shop For
3. Services You Can Shop For
4. Taxes and Other Government Fees
5. Prepaids
6. Initial Escrow Payment at Closing
7. Other

Page 3—Comparisons and More Loan Characteristics

The top of Page 3 says who your loan officer is, what their license number is, and how to contact them (you might also be interested to know how loan officers are compensated).

Comparisons:

• Total principal, interest, mortgage insurance, and loan costs you will have paid after having the loan for five years (remember, loan costs are on Page 2)
• Total principal you will have paid off after five years, or how much equity you will have in your home, excluding any increase or decrease in its market value.
• Annual percentage rate, a figure that accounts for the loan’s interest rate and fees combined.
• Total interest percentage, a figure that shows how much interest you will pay over the entire loan term as a percentage of how much you’re borrowing.

Other considerations:

This section tells you six more things about the loan for which you’ve applied:

• Appraisal
• Assumption
• Homeowner’s Insurance
• Late Payment
• Refinance
• Servicing

Escrow refers to a neutral third-party holding assets or funds before they are transferred from one party in a transaction to another. The third party holds the funds until both buyer and seller have fulfilled their contractual requirements. An escrow account is essentially a savings account that’s managed by your mortgage servicer. Your mortgage servicer will deposit a portion of each mortgage payment into your escrow to cover your estimated property taxes and your homeowners and mortgage insurance premiums.

A Closing Disclosure is a five-page form that provides final details about the mortgage loan you have selected. It includes the loan terms, your projected monthly payments, and how much you will pay in fees and other costs to get your mortgage (closing costs).

Title fees consist of several factors:

• Title insurance: Title insurance is an important coverage to purchase since it covers you — and your lender — in the event the seller doesn’t (or previous sellers didn’t) have clear ownership of the home or if the title isn’t clean. When you have title insurance, a title company will search public records to help determine if there are any ownership issues — and help resolve them. If anything is missed during their research, you’ll be covered.
• Loan policy of title insurance: If you’ve taken out a mortgage loan to purchase your property, your lender will require a loan policy of title insurance — also known as lender’s title insurance — to protect their investment until the loan is paid off. This way in case your home is lost to a title claim, your lender is protected.
• Owner’s policy of title insurance: On the flip side, an owner’s policy of title insurance — or homeowner’s title insurance — is what protects your ownership rights to the property. It’s usually a one-time fee that lasts as long as you own your home. It protects your investment against things like forgery, undisclosed heirs, errors or omissions in deeds and mistakes in examining records. Basically, this provides peace of mind that, should a title problem arise after you’ve already bought your home, your title insurance company will step in to help out both monetarily and legally if needed.
• Notary fees: You’ll need to notarize your mortgage deed of trust, which costs around $10.
• Government filing fees: Part of becoming a certified homeowner means officially recording the ownership of your new home as well as transferring taxes and other documents to your name. You’ll file your property and loan information at your local county courthouse for a fee — usually dependent on the number of pages you’re filing.
• Escrow fee/Settlement fee/Closing fee: You’ll have an escrow company who helps handle all the funds involved in the home-buying process. The title closing escrow fee is based on your loan amount and/or purchase price of the home. You’ll pay a fee to the escrow agent who helps you close.

The interest rate is the amount a lender charges a borrower and is a percentage of the principal—the amount loaned. The interest rate on a loan is typically noted on an annual basis known as the annual percentage rate.

Annual percentage rate (APR) refers to the yearly interest generated by a sum that’s charged to borrowers or paid to investors. APR is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan or income earned on an investment. This includes any fees or additional costs associated with the transaction but does not take compounding into account. The APR provides consumers with a bottom-line number they can compare among lenders, credit cards, or investment products.

The term “fixed-rate mortgage” refers to a home loan that has a fixed interest rate for the entire term of the loan. This means that the mortgage carries a constant interest rate from beginning to end. Fixed-rate mortgages are popular products for consumers who want to know how much they’ll pay every month.

• A fixed-rate mortgage is a home loan with a fixed interest rate for the entire term of the loan.
• Once locked in, the interest rate does not fluctuate with market conditions.
• Borrowers who want predictability and/or who tend to hold property for the long term tend to prefer fixed-rate mortgages.
• Most fixed-rate mortgages are amortized loans.
• In contrast to fixed-rate mortgages are adjustable-rate mortgages, whose interest rates change over the course of the loan.

The term adjustable-rate mortgage (ARM) refers to a home loan with a variable interest rate. With an ARM, the initial interest rate is fixed for a period. After that, the interest rate applied on the outstanding balance resets periodically, at yearly or even monthly intervals.

A mortgage is a type of loan used to purchase or maintain a home, land, or other types of real estate. The borrower agrees to pay the lender over time, typically in a series of regular payments that are divided into principal and interest. The property then serves as collateral to secure the loan.

A down payment is a sum a buyer pays upfront when purchasing an expensive good such as a home or car. It represents a percentage of the total purchase price, and the balance is usually financed. A down payment can significantly reduce the amount the borrower owes to the lender, the amount of interest they will pay over the life of the loan, and monthly payment amounts.

• A down payment is paid upfront in a financial transaction, such as purchasing a home or car.
• Buyers often take out loans to finance the remainder of the purchase price.
• The higher the down payment, the less the buyer will need to borrow to complete the transaction and reduce the interest paid over the long term.

PMI is a type of mortgage insurance that buyers are typically required to pay for a conventional loan when they make a down payment that is less than 20% of the home’s purchase price.

A HELOC is a revolving line of credit that is guaranteed by the equity in the home. You’re borrowing against the available equity in your home and the house is used as collateral for the line of credit. The HELOC account is structured like a credit card account in that you can only borrow up to a predetermined amount and make monthly payments on the account, depending on how much you currently owe on the loan. As you repay your outstanding balance, the amount of available credit is replenished – much like a credit card. You can choose to use some or all of your credit line, and you are charged interest based on only the amount that you’ve actually borrowed. So, if you haven’t used any of your line of credit, you won’t owe any principal or interest.

Pros:

1. Lower rates and APRs than credit cards. – CC National Average was at 20.92% February 2023.
2. Tax-deductible interest. – Interest paid on a HELOC is tax deductible as long as it’s used to “buy, build or substantially improve the taxpayer’s home that secures the loan,” according to the IRS.
3. Flexible withdrawals and repayments – 3yr-10yr draw periods.
4. Potential boost to credit history – This is just like a credit card and will positively impact your score with on time payments.
5. They are a good idea when used to fund improvements that will increase the value of your home.
6. In a true financial emergency, a HELOC can be a source of lower-interest cash compared to other sources, such as credit cards and personal loans.
7.  HELOCs allow you to borrow lesser amounts over time, so that you’re only taking the funds you need when you need them.
8. HELOCs are often used as a solution when the borrower is unable to qualify for a Second Mortgage.
9. You can use a home equity line of credit (HELOC) or a home equity loan to purchase a second home.

Cons:

1. Your home becomes collateral for the loan.
2. The amount of equity you’ve incurred will be reduced with the addition of another loan.
3. You’ll be adding another debt.
4.  If using an ARM product, your interest rate could rise – there are fixed-rate options available.
5. There is potential to run up a balance quickly, as with any tradeline.
6.  If you fail to make on-time payments or if you miss payments altogether, a HELOC will negatively impact your credit score, as with any tradeline.
7. Some lenders may require a prepayment penalty if paid off early. Many HELOC’s available today have prepayment penalties. However, most penalties apply only if the home equity line is both paid off and the account is closed to further cash draws or advances. Therefore, if the home equity line is paid down to a zero balance but is left open to future draws against the account, the penalty would not apply. In those instances where a home equity line borrower chooses to both pay off and close the account, the prepayment penalty normally imposed amounts to about $500 (this fee varies lender to lender).

Why would a HELOC be a better option?

• You want more flexibility.
• You want a better interest rate than a personal loan or credit card can offer.
• You already have a good mortgage rate and want to keep it.
• You plan to use your HELOC only for tax-deductible home improvement projects.

A second mortgage is a loan made in addition to the homeowner’s primary mortgage. When most people purchase a home or property, they take out a home loan from a lending institution that uses the property as collateral. This home loan is called a mortgage, or more specifically, a first mortgage. The borrower must repay the loan in monthly installments made up of a portion of the principal amount and interest payments. Over time, as the homeowner makes good on their monthly payments, the home’s value also appreciates economically.

The difference between the home’s current market value and any remaining mortgage payments is called home equity. A homeowner may decide to borrow against their home equity to fund other projects or expenditures. The loan they take out against their home equity is a second mortgage, as they already have an outstanding first mortgage. The second mortgage is a lump-sum payment made out to the borrower at the beginning of the loan.

A second mortgage is “subordinate” and holds the second lien position. This means that in the event of default, the original mortgage which has priority because it’s in the first lien position, would receive all proceeds from the property’s liquidation until it is paid off. Meaning the first mortgage lender gets paid before the second mortgage lender. This means that second mortgages are riskier for lenders that ask for a higher interest rate on these mortgages than on the original mortgage. If there are any remaining proceeds, they will then be used to pay off the second mortgage which now stands alone because it is no longer tied to the first. Second mortgage programs require immediate repayment like a traditional mortgage and do not allow you to defer payments.

Since the first or purchase mortgage is used as a loan for buying the property, many people use second mortgages as loans for large expenditures that may be very difficult to finance. For example, people may take on a second mortgage to fund a child’s college education or purchase a new vehicle.

Requirements for a Second Mortgage: To qualify for a second mortgage, you will need to meet a few financial requirements. You will need at least a credit score of 620, a debt-to-income (DTI) ratio of 43%, and a decent amount of equity in your first home. Because you are using the equity in your home for the second mortgage, you will need to have enough to not only take out your second loan but also be able to keep approximately 20% of your home’s equity in the first mortgage.

Pros:

1.  Interest rates on second mortgages are lower than on private loans or credit cards.
2. Lenders have accommodated the buyers’ needs and now there are more Non-QM, Fixed, Variable, Interest Only options on the market than ever before. This has opened the doors for many borrowers, who in the past may not have been able to qualify for a second mortgage. The shift to meet borrowers’ demands has eliminated limitations on program selection. Giving the borrower more options and more control.
3. Most lenders will allow you to borrow at least up to 80% of your home’s value, and some lenders will let you borrow more.
4. Homeowners might use a second mortgage to finance large purchases like college, a new vehicle, or even as a down payment on a second home.
5. Second mortgages can also be a method to consolidate debt by using the money from them to pay off other sources of outstanding debt, which may have carried even higher interest rates.
6. You receive a lump sum payment immediately.

 Cons:

1. You need a decent amount of equity in your home to take out a significant second mortgage loan. – If the appraisal comes back with a low value, (ex. The homes in the neighborhood did not appreciate and were sold for a lower price bringing the median home value down, there is significant damage to the home, new commercial construction has started within earshot, the home is outdated, etc…) the borrower may not be able to meet the loan-to-value requirements resulting in disqualification from that program. The first loan balance + the second loan balance is divided against the appraised value of your home. For example, a property with a first mortgage balance of $300,000, a second mortgage balance of $100,000 and a value of $450,000 has a CLTV ratio of 89%. This means there is only 11% equity and will not meet the lenders’ qualifying requirements.
2. It costs money to take out a second mortgage, as you must pay the closing costs up front, like a first mortgage.
3. Second mortgages often have higher interest rates than first mortgages but lower interest rates than a personal bank loan or credit card payment.
4.  If you can’t pay back a second mortgage, you risk losing your home.

If your home doesn’t appraise high enough and you don’t have enough equity in your home, you may not qualify for a second mortgage loan. – Majority of those who do not qualify based on those reasons, can usually qualify for a HELOC.

Subordinate Financing – Comparables

What is Cash-Out Refinance?

A cash-out refinance is a way to replace your current mortgage with a new one under new terms and get an additional lump sum of cash in the process. On the granular level, this means you’re taking out a new loan for more than your current mortgage balance using the equity and new appraised value. The new loan replaces your existing loan, and you receive the difference of your old loan’s equity plus the new appraised value (minus closing costs).

Understanding the difference between a refinance and a cash-out refinance.

Whenever you refinance, you’re starting over with a new mortgage that has different terms. Any of those goals can be accomplished without changing the amount borrowed.

In contrast, with a cash-out refinance, you’re getting a new loan that’s for more than you owe on your current mortgage. The difference between your new loan amount and what’s owed is where you get the “cash out.” How much cash depends upon your home equity and how much your home is worth compared to how much you owe.

What are the benefits of a Cash-Out Refinance?

• Use the payout to purchase an investment property.
• Use the payout to cover personal/medical expenses.
• Use the payout to pay off student loans or debts.
• Change the length of the mortgage.
• Get a new interest rate.
• Add or remove a borrower.
• Use the payout for renovations.

What is an ARM?

An adjustable-rate mortgage (ARM) is a home loan with an interest rate that adjusts over time based on the market. ARMs typically start with a lower interest rate than fixed-rate mortgages. If you are rate conscious an ARM is a great option if your goal is to get the lowest possible rate.

The initial low interest rate does not last forever. After the initial period, your monthly payment can fluctuate.

ARMs are long-term home loans with two different periods, called the fixed period and the adjustable period.

Fixed Period: First, there’s an initial fixed-rate period in which your interest rate won’t change.

Adjustment period: A period when your interest rate goes up or down based on benchmark changes.

Today’s ARMs are typically hybrid ARMs, which usually have a fixed interest rate for a period of 6 months, or three, five, seven or 10 years, followed by an annually or semi-annually adjusted mortgage rate for the rest of the 30- or 15-year loan term. The amount the interest rate can adjust is capped for the first adjustment (initial cap), subsequent adjustments (periodic cap), and an overall maximum adjustment (lifetime cap).

Why should you consider an ARM?

Getting an adjustable-rate mortgage makes the most sense in situations where there’s a big gap between fixed and variable mortgage rates and an expectation that at least one of the following situations will occur during your fixed term:

• You’ll sell the property.
• Interest rates will decline, giving you the opportunity to refinance into a fixed mortgage.
• Your rate caps are manageable, and you can still afford the home during the variable period, assuming a worst-case scenario