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Brochure contents
Adjustable-Rate Mortgage (ARM): The interest rates charged on these mortgages are tied to an interest-rate index. If the interest rate index rises, the mortgage interest rate and the monthly payment go up. If the interest rate index falls, the mortgage interest rate and monthly payment go down.
Adjustable-Rate Mortgage (ARM) Disclosure: This document describes the features of the adjustable-rate mortgage (ARM) program you are considering. It includes information about how your interest rates and payments are determined, how your interest rate can change, and how your monthly payment can change. The lender is required to provide this document to you when you hand in your application or before you pay a nonrefundable fee (whichever is earlier).
Amortization: This term refers to the gradual paying down of a loan. For example, traditional mortgage terms require that each payment include, in addition to interest, part of the loan principal. That way, you continually lessen the amount you owe and extinguish the debt within a set period of time.
Annual Percentage Rate (APR): The APR provides the true cost of a loan expressed as one number that enables you to compare all types of loans. The APR calculates the annual cost of the loan, taking into consideration points (loan origination fees), the interest rate, and other costs associated with getting the loan, including appraisal and credit report fees.
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Conventional Mortgage: Also called a fixed-rate mortgage or a traditional mortgage, the interest rate remains the same for the life of the loan. The loan term is typically 15 or 30 years.
Credit Report: This is a report containing detailed information on your credit history. The report includes identifying information and details about your credit accounts, loans, bankruptcies, late payments, and recent credit inquiries. Prospective lenders will obtain these reports, with your permission, to evaluate your creditworthiness. Every year, you should order a free copy of your credit report and review it for accuracy.
Credit Score: Your credit score is a measure of the risk you pose to someone who wants to lend you money. It is calculated using a standardized formula. There are many factors that could damage a credit score, including late payments and poor credit card use. Lenders may use your credit score to determine whether to give you a loan and what rate to charge. The better your credit score, the better the rate you can get on a loan.
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Debt-to-Income Ratio (DTI): This ratio represents your monthly fixed expenses divided by your gross monthly income (income before taxes and deductions). The lender uses this ratio to help determine how much it will lend you. If the percentage is greater than 36, the ratio could negatively impact your credit score because the lender considers you to have too much debt.
Good Faith Estimate (GFE): In this document, the lender estimates the amount of or range of charges for the specific settlement services that you are likely to incur in connection with the loan closing. The lender is required to deliver or mail the GFE to you within three business days after receiving or preparing the loan application.
Initial Truth in Lending (TIL) Disclosure: This document reflects the terms of the legal obligation between you and the lender. The lender is required to deliver or mail the TIL disclosure within three business days after receiving or preparing your loan application.
Interest-Only Mortgage: The borrower is required only to make interest payments for a specified number of years. When this initial period expires, the loan changes so the monthly payment includes principal and interest. At this point, the mortgage begins to fully amortize and monthly payments could increase significantly. The monthly principal payment could be greater than the conventional fixed-rate mortgage payment because there are fewer years to pay down the principal.
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Loan-to-Value Ratio (LTV): The ratio compares the value of the loan with the fair market value of the home. The lender uses it to determine if its potential losses (in the event that you do not pay) may be recouped by selling the house.
Minimum Monthly Payment (MMP): This required payment typically covers only a portion of the interest and none of the principal.
Negative Amortization: This can occur when you choose to make the minimum payments based on an offered “teaser” rate. The minimum monthly payment often does not cover the interest owed each month for a certain period of time. The interest that is not covered by these monthly payments becomes part of the principal. As a result, the balance of the loan increases and could eventually exceed what you intended to borrow in the first place.
Nontraditional Mortgages: These products are more complex than traditional fixed-rate or adjustable-rate mortgages. They present greater risk of negative amortization and payment shock. Typically referred to as alternative or exotic, these products take many different forms. They include interest-only mortgages, payment-option ARMS, low-doc. and no-doc. loans, piggybacks (simultaneous second lien loans – loans that cover the down payment) and 40- or 50-year mortgages. Although these products may provide flexibility for some, for others they may simply lead to increased future payment obligations and possibly financial disaster.
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Option-ARM: This product typically offers the borrower three different monthly payment options: 1) payments of principal and interest, 2) interest-only payments, or 3) minimum monthly payments (“teaser” payment options that are less than interest-only payments). Choosing minimum monthly payments (MMPs) means the unpaid interest is added to your principal loan amount. To ensure that the loan is repaid within the agreed-upon time, these loans “recast” after a set number of years (usually three or five) or when negative amortization drives the loan amount to a certain level above the original loan amount. Monthly payments increase so that the loan fully amortizes.
Payment Shock: Payment shock is a large and sudden increase in monthly payments. It occurs primarily in interest-only products and option-adjustable-rate mortgages (option-ARMs). Prepayment Penalty: The lender may charge a considerable fee if you pay off the loan early.
Private Mortgage Insurance (PMI): PMI is required by lenders when a loan is originated and closed without a 20 percent down payment. This insurance protects the lender from default losses in the event a loan becomes delinquent. If you are approved for a mortgage that requires PMI, you still have to apply for PMI and you may not qualify. You can be approved for a mortgage and not qualify for PMI.
Reduced-Documentation Loan: Commonly referred to as a low-doc. or no-doc. loan, this is a loan for which the lender sets reduced or minimal standards for documenting the borrower’s income and assets. For example, the borrower may state that her income is a certain amount, and the lender will accept that statement with little or no documentation. Low-doc. loans may charge a higher interest rate than traditional products.
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Simultaneous Second-Lien Loan: This product, also called a piggyback loan or soft second, provides an alternative to paying private mortgage insurance. (Lenders typically require PMI if your down payment is less than 20 percent of the purchase price.) The loan is originated simultaneously with the first-lien mortgage. There are many government programs offering these products to low- and moderate-income first-time homebuyers.
Be sure to compare the cost of this second mortgage with the cost of purchasing PMI. If you take a simultaneous second-lien loan in place of making a down payment, you reduce the equity you have in your home. Also, if your secondlien loan is a home equity line of credit (HELOC), you may be exposed to increasing interest rates and higher monthly payments.
Teaser Rates: These are low rates that lenders offer to make mortgage products more attractive. When the “teaser-rate” period expires, the lender raises the interest rate for the remainder of the loan period. This new rate may be fixed or change periodically, depending upon the terms of your loan.
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