I often have people ask me about mortgage terminology. Below are definitions of various mortgage terms as they apply to buyers of Minnesota Real Estate.
Conventional Mortgage
A mortgage loan made by an institutional lender without the inclusion of government guarantees such as VA or FHA loans.
Federal Housing Administration (FHA)
An agency of the federal government, the Division of the Department of Housing and Urban Development, that sets standards for the underwriting of private mortgages and insures residential mortgages made by private lenders. Federal Housing Administration (FHA) low-rate loans are available to Americans with smaller incomes who are interested in modestly priced homes. Down payment requirements are usually lower than the prevailing ones.
Veterans' Administration Loans (VA)
Mortgage loans to veterans by banks, savings and loans, or other lenders that are guaranteed by the Veterans' Administration, enabling veterans to buy a residence with little or no money down.
Adjustable Rate Mortgage (ARM)
A mortgage, which allows the lender to adjust the mortgage's interest rate periodically on the basis of changes in a specified index. Interest rates may move up or down, as market conditions change. The change in interest rate will result in a change in the periodic payments due under the mortgage. ARMs are attractive when short-term interest rates are trending lower.
Balloon Mortgage
Usually a short-term fixed-rate loan that involves small payments for a certain period of time with the balance due in a single, large payment at a time specified in the contract. Whenever the balloon mortgage becomes due, the entire unpaid balance is due. Generally, the homeowner must either refinance or sell the property.
Buy-Down
The payment of extra money on a loan now so as to provide a lower interest rate over either a given period or over the life of the loan. To buy-down a mortgage, the buyer pays additional points to the lender, which will decrease the interest rate for a specific period.
Fixed-Rate Mortgage
The interest rate you pay and the monthly principal and interest payments are agreed upon from the outset and will not change throughout the entire term of the mortgage.
Deferred Interest Mortgage
A mortgage in which the payment is not sufficient to cover the principal and the interest and the payment portion of the interest is postponed until a certain date at which time the interest postponed is added to the principle owing.
Wraparound Mortgage
A secondary financing option in which a new larger mortgage is created to encompass the first mortgage. This large second mortgage is used to preserve the low interest rate on the first mortgage for a potential buyer.
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