Guide to Buy a Home in New York | Obtaining a Loan Part II
Guide to Buy a Home in New York
6.1
Obtaining a Loan, Part II
Obtaining a Loan Part II
Financing Terminology
When you are deciding which loan product to choose, you should be familiar with the following loan terms:
Amortization. The process of paying the principal and interest on a loan through regularly scheduled installments. The majority of each payment is applied toward interest owned initially. The later payments on the loan are increasingly applied toward the principal.
Principal. The sum of money you borrow from the bank
Interest. Expressed as a percentage called the interest rate, it is the fee that the lender charges you to use the money you borrow.
The Term. The period of time for which you borrow the money. Most loans are either 15 or 30 years.
Rate Lock. An agreement with your lender whereby your lender agrees to give you a specific interest rate if you close your loan within a specified period of time. Rate lock periods generally run from 30 to 60 days and may be extend for an additional fee paid to the lender. Generally, the longer the term of the lock-in period, the higher the interest rate. It is important to remember that there frequently are delays in closings. This is particularly true when purchasing a co-op apartment, since board approval is required before you can close. In addition, a seller has the right to postpone the closing date beyond the date in the contract if he or she is not able to or ready to close. You should consult with your attorney before locking in your interest rate so that you do not prematurely lock in your rate.
Escrow. A special account that a lender uses to hold a borrower’s monthly payments for monthly real estate taxes and insurance.
Equity. A determination of the value of a property after existing liens are deducted.
Points. A payment made to the bank equal to a certain percentage of the loan amount to reduce the interest rate. One point equals one (1%) percent of the loan amount.
Discount Points (also known as the Loan Origination Fee). A fee that you can pay to your lender to lower your interest rate. Generally, for each point you pay for a 30-year loan, your interest rate is reduced by 1/8th (0.125) of a percentage point. Lenders offer various rate and discount point combinations.
Application and Processing Fees. Fees charged for evaluating, preparing, and submitting a loan application to a lender.
Conforming Mortgage Loan. Any loan that is at or below the amount that Fannie Mae or Freddie Mac can purchase or securitize in the secondary loan market. Your mortgage broker or loan officer can tell you what the current loan limit is.
Federal Funds Rate. The interest rate that banks charge each other on overnight loans made between them. These loans Generally are made so that banks can cover their daily cash flow and reserve requirements. The rate is determined by the supply and demand of the funds.
Fannie Mae and Freddie Mac. The nation’s two federally chartered and stockholder-owned mortgage finance companies. These banks do not provide loans on a retail basis. They instead purchase and/or securitize loans made by other banks. Since these banks are directed by their charters to serve moderate and middle-income families, they have loan limits on the purchase or securitization of mortgages.
Jumbo Mortgage Loan. A loan for an amount exceeding the Fannie Mae and Freddie Mac loan limit. A loan in excess of this limit is considered a jumbo loan and generally carries a higher interest rate.
Loan to Value Ratio (LTV). The money borrowed relative to the value of the property. An LTV of eighty (80%) percent means that the loan amount equals eighty (80%) percent of the value of the property.
FHA Loans. The federal government, through the Federal Housing Administration (FHA), helps low and moderate-income families to become homeowners by providing an insurance program that encourages lenders to make loans to borrowers who might not be able to meet conventional underwriting requirements by insuring the lenders against loan defaults.
Primary Residence. A home used as one’s primary residence will qualify for a lower interest rate than one used as second home or investment property.
Prepayment Penalty. A loan, which requires that the borrower pay a fee to the lender if the loan is paid in full or in part before the term of the loan expires.
Underwriting. The determination of the risk a lender would assume if a particular loan application is approved. The purchaser’s perceived ability and willingness to abide by the mortgage loan terms as well as the value of the property involved are factors in the underwriting analysis.
Appraisal. An appraisal is performed on behalf of a bank in the process of evaluating a borrower for a mortgage. The purpose of an appraisal is to determined if the price you are paying for the home is justified by recent sales of comparable properties. For the loan to b approved, the property’s market value must meet the bank’s loan to value ratio requirement.
Source: Keith A. Schuman