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| FAQ: Definition Of Terms |
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What Are Discount Points?
Discount points are charged by a lender to compensate the lender for a lower interest rate. Generally, the lower the offered interest rate, the higher the points. One point is equal to one percent of the loan amount.
What Is Loan-To-Value?
Loan-to-value, commonly referred to as LTV, is the mathematical relationship between the value of the property and the amount of the loan, expressed as a percentage. The loan-to-value is derived by dividing the loan amount by the value of the property. For example, if a property is valued at $100,000 and the loan balance is $80,000, the loan-to-value is 80%.
What Is An Appraisal?
The appraisal is the examination of a property, by a qualified, professional appraiser, providing an estimate of its fair market value and a written report.
What Is A Loan Origination Fee?
The loan origination fee is the amount that a lender charges to cover the administrative costs to process a loan. The loan origination fee is often expressed in terms of points, or as a percentage of the loan amount.
What's The Difference Between Conforming And Non-Conforming Home Loans?
Most loan rates that you hear quoted are for conforming loans. A conforming loan is one with an original balance of $333,700.00 or less for a single-family home, Two-family loans: $427,150 Three-family loans: $516,300 Four-family loans: $641,650 Any loan amount larger than that is called non-conforming.
Note: One to four-family mortgages in Alaska, Hawaii, the US. Virgin Islands and Guam are 50 percent higher than the limits for the rest of the country.
Two major agencies the Federal National Mortgage Association (FNMA) or Fannie Mae and the Federal Home Loan Mortgage Corporation (FHLMC) or Freddie Mac can purchase conforming loans. For lenders who sell their loans after they are closed, there is an extremely liquid market. But the availability of potential buyers is reduced greatly when the loan amount goes above the conforming limit. To attract enough buyers for these loans, a lender often increases the rate on non-conforming loans. The conforming loan limit is adjusted annually at year-end by FNMA and FHLMC. Some lenders also have their own guidelines for dollar differentiation between conforming and non-conforming loans.
What Is Prepaid Interest?
This is interim interest that accrues on the mortgage loan from the date of the settlement to the beginning of the period covered by the first monthly payment. Since interest is paid in arrears, a mortgage payment made in June actually pays for interest accrued in the month of May. Because of this, if your closing date is scheduled for June 15, the first mortgage payment is due August 1. The lender will calculate an interest amount per day that is collected at the time of closing. This amount covers the interest accrued from June 15 to July 1.
What Are Closing Costs? What Is An Escrow Account?
Closing costs and procedures vary from state to state and from county to county. In some jurisdictions, an attorney represents the lender. In others, the title company represents the lender. There may be state or county transfer taxes to be paid. There may also be fees for recording certain documents. There are also standard charges that are paid at all closings. Taxes, title insurance premiums, and interest on the loan prorated from the closing date to the end of the month.
Prior to closing, be sure to inquire if the lender requires an escrow account set up for the payment of the real estate taxes and homeowners insurance. Some lenders will waive the escrow requirements if the down payment is above a certain limit. Depending on when you close and when real estate taxes are paid in your jurisdiction, the cash required to set up the real estate tax escrow could represent one-half to three-quarters of the annual real estate tax bill.
It is important that you review what the closing costs will be with your lender and attorney. This should take place far enough in advance of the closing to allow you time to obtain the necessary funds to pay the closing costs.
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