A real estate glossary

Sometimes real estate professionals and lenders forget that buyers and sellers, the most important people in the housing industry, aren't necessarily familiar with important terms. Here's a glossary for you.

Adjustable Rate Mortgage (ARM) - A type of mortgage rate loan whose interest rate changes periodically up or down, usually once or twice a year.

Annual Percentage Rate (APR) - Everything financed in your mortgage loan package (interest, loan fees, points or other charges) expressed as a percentage of the loan amount (usually slightly above the actual interest rate alone).

Asking Price - The initial selling price of a property, determined by the seller

Assumable Loan - A loan in which the lender is willing to “transfer” from the previous owner of the home to the new owner, sometimes at the same interest rate, sometimes at a new rate. An assumable loan can make your home more attractive to buyers when you want to sell.

Closing Costs - Costs the buyer must pay at the time of closing in addition to the down payment: including points, mortgage insurance premium, homeowners insurance, prepayments for property taxes, etc. Closing costs average 3 percent -4 percent of the loan amount. If you're buying a HUD Home, you can request they be paid by HUD, if the sales incentive is offered.

Contingency - A condition put on an offer to buy a home; such as the prospective buyer making an offer contingent on his or her sale of a present home.

Conventional Mortgage - A type of mortgage not insured by either the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA), and thus usually requiring a 10 percent - 20 percent down payment. (HUD Homes may be purchased with a conventional mortgage.)

Earnest Money - Funds submitted with an offer to show “good faith” to follow through with the purchase. Earnest money is placed by the broker in an escrow/trust account until closing, when it becomes part of the down payment or closing costs. (HUD generally requires an earnest money deposit of $500-$2,000.)

Escrow - A procedure in which documents or transfers of cash and property are put in the care of a third party, other than the buyer or seller.

FHA Financing - Financing for a loan which will be insured against loss by the Federal Housing Administration—a part of the U.S. Department of Housing and Urban Development (HUD). Such financing allows for a lower down payment than required by most lenders.

Homeowners Insurance - Insurance that protects the homeowner from “casualty” (losses or damage to the home or personal property) and from “liability” (damages to other people or property). Required by the lender and usually included in the monthly mortgage payment.

Inspection Report - Written record of a property's condition, including the foundation, interior, roof, kitchen & baths, foundation, heating & A/C.

Loan Origination Fee - A fee charged by the lender for evaluating, preparing, and submitting a proposed mortgage loan.

Mortgage Insurance Premium (MIP) - A charge paid by the borrower (usually as part of the closing costs) to obtain financing, especially when making a down payment of less than 20 percent of the purchase price, for example on an FHA-insured loan.

Point - An amount equal to one percent of the principal amount being borrowed. The lender may charge the borrower several “points” in order to provide the loan.

Property Taxes - Taxes (based on the assessed value of the home) paid by the homeowner for community services such as schools, public works, and other costs of local government. Paid as a part of the monthly mortgage payment.

Title Insurance - Protects lenders and homeowners against loss of their interest in property due to legal defects in the title.

VA Loan - A loan guaranteed by the Department of Veterans Affairs against loss to the lender, and made through a private lender. (HUD Homes may be purchased with a VA loan.)

Warranty - A binding promise that some product or service will be provided in the future.

Source: BiggerPockets.com

Mortgages: what's up, what's down

RISMEDIA, March 13, 2008-The Mortgage Bankers Association (MBA) released its Weekly Mortgage Applications Survey for the week ending March 7, 2008. The Market Composite Index, a measure of mortgage loan application volume, was 671.7, a decrease of 1.9% on a seasonally adjusted basis from 684.9 one week earlier. On an unadjusted basis, the Index decreased 1.4% compared with the previous week and was down 3.4% compared with the same week one year earlier.

The Refinance Index decreased 4.7% to 2448.2 from 2569.0 the previous week and the seasonally adjusted Purchase Index increased 1.6% to 368.8 from 363.1 one week earlier. The Conventional Purchase Index decreased 0.4% while the Government Purchase Index (largely FHA) increased 10.0%. On an unadjusted basis, the Purchase Index increased 2.3% to 410.8 from 401.6 the previous week. The seasonally adjusted Conventional Index decreased 3.3% to 898.0 from 929.0 the previous week, and the seasonally adjusted Government Index increased 6.0% to 294.5 from 277.8 the previous week.

The four week moving average for the seasonally adjusted Market Index is down 12.1% to 711.1 from 809.1. The four week moving average is down 2.4% to 361.9 from 370.7 for the Purchase Index, while this average is down 18.2% to 2752.5 from 3365.8 for the Refinance Index.

The refinance share of mortgage activity decreased to 50.6% of total applications from 52.4% the previous week. The adjustable-rate mortgage (ARM) share of activity decreased to 15.5 from 17.3% of total applications from the previous week.

The average contract interest rate for 30-year fixed-rate mortgages increased to 6.37% from 5.98%, with points decreasing to 1.05 from 1.15 (including the origination fee) for 80% loan-to-value (LTV) ratio loans.

The average contract interest rate for 15-year fixed-rate mortgages increased to 5.72% from 5.26%, with points decreasing to 1.06 from 1.08 (including the origination fee) for 80% LTV loans.

The average contract interest rate for one-year ARMs increased to 6.72% from 5.83%, with points increasing to 1.27 from 0.85 (including the origination fee) for 80% LTV loans.

Is a refi right for you?

Radio airwaves, magazines and newspapers are filled with advertisements from lenders encouraging homeowners to refinance their home mortgages. These messages extol the virtues of switching from Adjustable Rate packages to fixed mortgages to lock in lower interest rates. The question is: would refinancing your mortgage really be the right move for you?

Rise of the Refi

Interest rates have fallen dramatically since the first of the year, and as a result mortgage refinancing has been gaining steam across the country. Applications to refinance existing mortgages have been on the rise in recent weeks. Many of these homeowners are just as attracted to the possibility of getting out of riskier Adjustable Rate Mortgages as they are to lower rates.

Whether or not you should refinance your mortgage depends largely on your personal circumstance. Most important are the interest rate and terms of your current mortgage as well as your outlook (how long you intend to own your home).

The conventional wisdom has always been that you shouldn't refinance until the interest rate has dropped a full point (or more) below what you're currently paying. The basic theory behind this advice is sound enough: given the typical costs associated with refinancing, chasing lower interest rates is only financially sound once the rates drop below a certain threshold. But the old rules fail to take into account some of today's situations, such as owners wanting to switch from an ARM to a fixed rate mortgage or those eyeing a "no-cost" refi.

Things to consider

As with most money matters, there is no "one-size-fits-all" answer to the refinancing question. If you're considering refinancing, consider these elements:

• Rate - Interest rates have been dropping throughout 2008, and a large number of homeowners are seeking to take advantage by locking into lower rates. Some believe that it is better to wait and see if rates will continue to drop, owing that the general trend has been downward. On the other hand, the current rates are a known commodity that you may wish to take advantage of.

• Risk - Historically the main motivation for refinancing a mortgage has been to secure a loan with a lower interest rate. But many homeowners are now seeking to refinance mainly for the kind of security that ARM products typically can't offer. If you have concerns over future fluctuations or spikes in interest rates, you may wish to lock in a fixed 15 or 30 year fixed rate mortgage, particularly if there is no annual or lifetime cap on the amount that your current loan can increase.

• Term - In addition to the rate and structure of your loan, take into account the term of your current loan and any potential refinance. For example, if you've already paid off eight or nine years of your current mortgage, you might find opportunity in a fixed 15-year or 20-year loan as opposed to the more common 30-year product. In general, extending the total term of your loan will negate the benefits of lower interest rates, so try to keep the bigger picture in mind.

• Closing Costs - As with primary mortgages, refinancing a mortgage entails up-front expenses. Many lenders are offering refinancing packages with modest out-of-pocket expenses. Even if lower than average, these costs may be substantial and additional fees may be added to your loan balance. Some lenders are even offering "no-cost" refinancing in order to attract homeowners. Remember that in such cases you'll likely not get the lowest interest rate available in the market. Be sure to carefully weigh the benefits of any "no-cost" package against those of traditional refinances available to you.

The Break-Even Point

Unless you've secured no-cost refinancing, you'll need to weigh the cost of the new loan against the amount you'll save over the term of the loan. One simple way to determine if refinancing is in your best interest is to determine the amount of time (with your monthly savings) it would take to recoup any fees or closing costs.

To start you'll need to determine your (potential) monthly savings. Review your payment coupon to verify the amount of your current monthly interest and principal. After establishing the rates and loan packages that you qualify for, ask your loan officer or mortgage broker for an estimated monthly payment. Many online mortgage calculators can also help you determine monthly costs if given the principal loan conditions.

You can now use that monthly savings to determine the point at which you'll begin to see a real return. For example, say refinancing will entail $2000 in costs but will save you $50 every month in payments. If you divide the mortgage fees by the monthly savings you find that the "break-even" point is 40 months from now. After that point the monthly savings would no longer be mitigated by the up-front costs.

Again, your personal situation determines whether or not the prospect of refinancing is truly viable. If you plan to own your home for many years or the cost of refinancing is very low, then you're more likely to realize the benefit of securing a new mortgage.

A caveat: be sure to check your calculations with a mortgage broker you trust. Online services may appear to be less expensive, but you have no idea with whom you're dealing.