This table will help you see the price of a home you can afford. An old rule of thumb is that you can comfortably spend a third of your gross monthly income for your mortgage payment. (Lenders usually allow more.) This payment is listed in the lefthand column. Across the top are possible interest rates, so you can see the home you can afford at various interest rates. These are figures for principal-and-interest payments on a 30 year mortgage. (For higher monthly payments: For example, $3000 payments, double the home value of a $1500 payment.)
Additional Pincipal Payment: You can reduce the remaining balance of your loan by paying more than the principal amount due, at any time. Preferably,you'd have no "pre-payment penalty" in your loan terms.
Adjustable Rate Mortgage (ARM): A mortgage with an interest rate that changes, at a stated frequency, according to changes in an index rate (such as the interest rate on Treasury bills). There may be a pre-set interest rate floor and ceiling, and other adjustable features.
Amortization: Repayment of a mortgage loan in monthly installments that include both principal and interest.
Amortization Term: The number of months needed to fully pay off, or amortize, a mortgage loan. For instance, 15 years is 180 months.
Annual Percentage Rate (APR): The percentage you pay on your loan annually, including interest, loan fees, and mortgage insurance.
Appraisal: Value of property, determined by an independent, qualified appraiser in a detailed report.
Asset: Anything of value you own, including real estate, bank accounts, stocks and bonds, IRA's, Keogh's, enforceable claims.
Assignment: One party assigns, or transfers, a mortgage to another party.
Assumable: An assumable mortgage is transferable from the seller to the new buyer. Lenders may charge a fee to the purchaser for this. If the full balance is "due on sale," then the loan isn't assumable.
Balance Sheet: Shows assets, liabilities and net worth.
Balloon Payment: A lump sum paid on a mortgage, at the end of a specified period of time. Often, the borrower may only pay interest for several years, and then pay the entire principal at once.
Bridge Loan: A loan for which the borrower's present home is collateral, allowing purchase of a new home before the present one is sold.
Buydown: Paying the lender up front, to reduce monthly payments for a number of years.
Cap: Limits on how much the interest or monthly payment can increase on adjustable rate mortgages.
Closing (or Settlement): A meeting where the loan transfer is finalized with the signing of documents.
Closing costs are paid.
Closing Costs: Costs of arranging a loan, aside from the price of the property. These include title insurance, appraisal, escrow cost, broker's fee, etc. The seller sometimes joins the borrower in paying closing costs.
Credit Bureau: Prepares a credit report on a borrower's credit history.
Credit Risk Score: A number that indicates a borrower's overall credit worthiness. Fair Isaac (FICO) is the most well-known score.
Down Payment: Part of the purchase price of property which is paid up front by the borrower, not financed through a mortgage loan.
Equity: The value of your property, minus what you still owe on the mortgage.
Escrow: Property, money or documents held by a neutral party, to be delivered after certain conditions are met. For instance, you receive title to your home from the escrow officer of the title insurance company, after your mortgage is fully paid. And some escrow funds may pay taxes, insurance, etc.
Fannie Mae: A private company, founded by Congress, the largest source of mortgage funds.
FHA Mortgage: A mortgage governmentally insured, by the Federal Housing Administration.
Fixed Rate Mortgage (FRM): A mortgage whose interest rate is set for the entire length of the loan.
Ginnie Mae: A government-owned company for special assistance with loans.
Housing Expense Ratio: Percentage of your gross monthly income that goes to housing expense.
Late Charge: A penalty if the monthly mortgage installment is paid late (usually at least 15 days late).
Lease-Purchase Mortgage: Leasing with a monthly accumulation towards a down payment.
Liability: Any financial obligation you have, such as a mortgage, car loan, child support payment, back taxes, installment payments on credit cards, or other debt.
Line of Credit: An agreement from a lending institution to extend you credit up to a certain spending limit.
Liquid Asset: Cash or easily convertible to cash. This can include the equity in your property, if you have it up for sale.
Loan-to-Value (LTV): The amount of the loan compared to the value of the property. For instance, a $75,000 loan on a $100,000 house gives an LTV of 75%.
Lock (Rate Lock): During the loan application process, a lender may guarantee a certain rate and terms for a specified amount of time, such as 3 weeks or a month.
Mortgage: Document that pledges a property to a lender as security for a loan.
Mortgage Broker: A licensed professional (such as Bob Forrest) who brings borrowers and lenders together and helps negotiate the contract between them.
Mortgage Insurance: Insures the lender against loss if the borrower defaults on payment.
Origination Fee: Fee paid in "points" to a lender for processing a loan. One "point" is 1% of the amount of the loan. The seller may pay part of the fee.
Owner-financed: The party selling a property provides part or all of the financing. Also called "Seller Carry-back."
Private Loam: Loans funded by an individual, group or business that does not sell their lloans to an agency of the US government.
PITI Reserves: After closing, the home-buyer usually must have reserves on hand to pay principal, interest, taxes, insurance (PITI), usually a 3 month reserve.
Pre-approval: Determination of how much money you should be able to borrow, before you apply for a loan.
Principal Balance: How much of the principal (the amount borrowed) is still owing, exclusive of interest or other charges.
Qualifying Ratios: Used to see if you qualify for a loan. One is the Housing Expense Ratio (see above). The other is Debt to Income Ratio (Total Expense Ratio).
Recording: Copies of legal documents are kept at the County Registrar's Office.
Refinance: Paying off other commitments with the proceeds of a new mortgage loan on your property. You might want to pay off your original mortgage because now you can find better rates or terms. Or you might want to pay off various debts, or pay for home improvements or your child's college, etc.
Reverse Mortgages: This is a loan that enables a homeowner to get money back from their equity without selling their house.
Revolving Debt: It allows customers to borrow against a pre-approved line of credit; a credit card operates this way.
Second Mortgage: When you've built up equity in a property, you can take a loan against that value while keeping your original, first mortgage. Also called an equity loan. This can be a smaller loan, with less cost to arrange, than refinancing the entire mortgage.
Security: The property which is your collateral for your loan.
Servicer: A company, such as title insurance companies, that collects payments from borowers and manages their escrow accounts.
Truth-in-Lending: Law requiring lenders to disclose, in a document, all the terms of a mortgage including APR (see above) and other charges.
Underwriting: Underwriters work for lending institutions, analyzing the credit worthiness of a potential buyer, the value of the property, etc., to see if a loan is worth the risk.
VA Mortgage: A mortgage guaranteed by the Department of Veterans Affairs.
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