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Home Loans and Refinance Loan Jargon

Apparently, homeownership has its privileges but what do those mortgage terms really mean? During your quest for buying that new home, familiarizing yourself with the jargon of the mortgage industry will eliminate great confusion:

Down Payment is the sum of cash paid by the buyer during the closing that accounts for the difference between the mortgage amount and the home purchase cost.

Earnest Money is the money provided by a home buyer to a seller as a deposit. The earnest money represents a buyer’s commitment to make the future transaction. (At the closing, earnest money is subtracted from the closing fees).

Equity is the value a home owner has in real estate above and beyond the obligation against the property. Essentially, equity is fair market value subtracted from the current indebtedness of the property.

Escrow is the term used to define the funds that, provided to a third party, are retained to cover expenses in the way of tax, earnest money deposits and insurance payments during the term of the mortgage or refinance loan.

Fixed Rate Mortgage is a mortgage rate where the interest rate remains stable and constant during the life of the refinance loan or mortgage loan.

Loan-to-Value Ratio is the ratio between the appraisal value of the home property and the amount of the mortgage loan.

Market Value is the price a property can potentially bring in when put up for sale on the real estate market.

Mortgage Insurance is an insurance that warrants lenders against the loss of a borrower defaulting on either a refinance or mortgage loan. (Mortgage insurance or private mortgage insurance is a requirement if the loan-to-value ratio is more than 80 percent).

Origination Fee is the rate charged by a lender for administering and processing the loan application. (Normally, the origination fee is calculated as a percentage of the home loan).

PITI is the acronym for principal, interest, taxes, and insurance.

Underwriting is the decision-making process by which lenders have a valid basis for either granting or denying the financing or refinancing of a loan.

Variable Rate Mortgage is more commonly referred to as the Adjustable Rate Mortgage (ARM). The variable rate mortgage reflects the rate a home loan or refinance loan will adjust periodically based on the pre-selected index.