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Beginners guide to mortgage terminology
BY SCOTT GIBERTINI, Guess Columnist
Buying a home can be exciting but a bit overwhelming. Along with gathering financial information and picking out a house comes a lot of paperwork, often with terms you might not understand.
For example, do you know what a promissory note is or what is actually involved in a mortgage?
Too often we see people get discouraged because they didn’t fully understand the information put in front of them. With that in mind, here are some terms you should get familiar with before looking to get a mortgage:
Borrower: This is the person who received a loan from the lender and is obligated to repay the loan. The role of the co-borrower is what often confuses people. The co-borrower is as responsible for the loan as the borrower is, and if the borrower does not make the payment, the lender will pursue both the borrower and co-borrower for compensation.
Lender: The bank or organization that creates the mortgage, gives the funds and receives the payments is the lender. It’s also not uncommon for the original lender to sell a loan to another lender. For example, you may pay Wells Fargo for the first three years, but then that bank might sell the mortgage to another bank.
Mortgage: Many people are familiar with the word mortgage, yet they don’t fully understand what it entails. With a mortgage, you are borrowing money against a property or home. The home then becomes collateral. Often there are conditions outlined in the mortgage that the borrower must agree to, such as not turning a residential property into a business enterprise.
Collateral: This is the actual home or condominium backing up the mortgage. Collateral is offered as security in case the mortgage doesn’t get paid.
Underwriting: This is the process of reviewing your financial information so that the bank can decide if it wants to lend money under its lending guidelines. There is a strict set of rules that underwriters must follow to ensure that they’re not making irresponsible loans.
Promissory note: This is the document stating that you promise to repay the mortgage. This doesn’t mention collateral. The mortgage document is what ties the house back to the loan as collateral.
Principal portion of payment: A portion of each mortgage payment is dedicated to repayment of the principal, or the amount owed on a loan separate from interest. Loans are structured so that principal payments start out small and increase with each mortgage payment.
Closing costs: This includes other expenses incurred in order to purchase the home, including title work, appraisal, survey, document stamps, taxes or fees charged by municipality.
Interest payment: Interest is the lender’s reward for taking a risk and lending the money. The interest is based on the current interest rate and is a percentage applied to the remaining principal loan amount.
Points: This term often gets bounced around during the process. One point equals one percent of the loan amount. In some cases, you may be able to pay 1 point to reduce the interest rate in a loan.
Liquidity or reserves: These are common terms that the industry uses when talking about how much cash a person has available that could be used for a down payment or closing costs. Reserves are the amount of cash that a person will have left over after closing. The lender sometimes requires that extra costs are set aside to show that you have extra cash available, and are not going to go into closing spending every last dollar you have.
Scott Gibertini brings more than 24 years of business and banking experience to the USAmeriBank team, providing clients with information and tools to make home financing decisions. He received a bachelor’s degree from the University of South Florida and graduated from the Florida Bankers Association’s Florida School of Banking program.
For more information about mortgages or other banking needs, contact USAmeriBank’s St. Petersburg branch at 727-394-3164. Scott Gibertini NMLS: 337469, USAmeriBank NMLS: 456668