Common terms used to describe a mortgage include “lender,” “debtor,” and “mortgage broker.” It may be self-explanatory what those terms mean, but there are also other terms related to a mortgage that a homeowner may not be fully familiar with. We are going to cover some of them here:

Creditor

The creditor is the financial entity, normally a bank, that provides the money in the form of a loan for the amount of the mortgage. The creditor is sometimes referred to as a mortgagee or lender.

debtor

The debtor is the person or party who owes the mortgage or loan. They may be referred to as the mortgagor.

Many houses are owned by more than one person, such as a husband and wife, or sometimes two close friends buy a house together, or a child with their parents, and so on. If this is the case, both people become debtors on that loan, and not just owners of the property.

In other words, be careful not to put your name on the deed or title to any home, as this also makes you legally responsible for the mortgage or loan attached to that home.

Mortgage broker, financial adviser

Mortgages are not always easy to come by, however, due to the demand for housing in most countries, there are many financial institutions that offer them. Banks, credit unions, savings and loans, and other types of institutions may offer mortgages. The prospective borrower can use a mortgage broker to find the best mortgage at the lowest interest rate for them; The mortgage broker also acts as an agent for the lender to find people willing to take on these mortgages, to handle the paperwork, etc.

There are usually other parties involved in closing or obtaining a mortgage, from attorneys to financial advisors. Because a private home mortgage is often the largest debt anyone will have in their lifetime, they often seek whatever legal and financial advice is available to make the right decision. A financial adviser is someone who can familiarize himself with her own particular needs, income, long-term goals, etc., and then give her the best advice on what her loan needs may be.

Mortgage’s trial

When the borrower is unable or fails to meet the financial obligations of the mortgage, the property may be foreclosed, which means that the creditor repossesses the property to recover the remaining cost of the loan.

Typically, a foreclosed home will be sold at auction and that sale price will be applied to the outstanding amount of the mortgage; the debtor may still be responsible for the remaining amount if the property sold for less than the outstanding balance of the mortgage.

For example, suppose a person still owes $50,000 on their mortgage and their house is foreclosed on. At auction, the house sells for just $45,000. The debtor is still responsible for the remaining difference of $5,000.

Most banks and financial institutions will try to avoid foreclosure on any of their debtors’ properties if possible. Not only do they risk not being able to sell the home at auction at any price, but additional costs and risks are incurred when the previous owners vacate the home. This includes vandalism, squatters (people who trespass on vacant lots or empty houses and stay there until they are forcibly evicted), fines from cities for neglected yards, etc.

Annual Percentage Rate (APR)

The APR should not be confused with the interest rate on a mortgage.

The APR is the interest rate on a loan plus any additional costs of obtaining the loan, such as points, origination fees, and mortgage insurance premiums (if applicable).

If there were no costs involved in obtaining a loan other than the interest rate, then the APR would equal the interest rate.

Breakeven

The break-even point is the time it will take to recover the costs incurred to refinance a mortgage. It is calculated by dividing the amount of closing costs for the refinance by the difference between the old and the new monthly payment.

For example, if it costs you $5,000 in fees, penalties, etc., to refinance your mortgage, but you save $300 per month on your payments with your new mortgage, break-even is after 17 months (17 months x $300 per month = $5,100).

RMA

This is referred to as an adjustable rate mortgage; a mortgage that allows the lender to adjust your interest rate periodically.

fixed rate mortgage

A mortgage in which the interest rate does not change during the term of the loan.

layer

ARMs have fluctuating interest rates, but those fluctuations are generally limited by law to a certain amount.

These limitations can apply to how much the loan can be adjusted over a six-month period, a yearly period, and over the life of the loan, and are called “limits.”

Index

Number used to calculate the interest rate of an ARM. The index is usually a published number or percentage, such as the average interest rate or yield on US Treasury bills. A margin is added to the index to determine the interest rate to be charged on the ARM.

Since the rate can vary with ARMs, many people considering refinancing do well to keep abreast of the standard interest rate set by the federal government, as it is often used by lenders to calculate that rate.

prime interest rate

The interest rate that banks charge their preferred customers. Changes in the prime rate influence changes in other rates, including mortgage interest rates.

Equity

The financial interest of an owner or the value of a property. Equity is the difference between the fair market value of the property and the amount still owed on your mortgage and other liens, whichever is greater.

In other words, if the home’s fair market value is $200,000 and your mortgage (and other liens, if applicable) is only $150,000, then the home has $50,000 in equity.

Home Equity Loan

Loans secured by a specific property that were made against the “equity” of the property after it was purchased.

Using the illustration above of a home that has $50,000 in equity, a homeowner can obtain a loan for that amount, using the home as collateral for that loan. A lending institution knows that if the homeowner defaults on the loan, they can repossess the property and sell it for at least that amount, recovering the loan amount.

Amortization

The gradual payment of a mortgage loan, usually in monthly installments of principal and interest.

An amortization table shows the payment amount broken down by interest, principal, and unpaid balance over the entire term of the loan. These tables are useful because when a mortgage payment is made, the same amount is not applied to principal and interest month after month, even when the payment amount is the same. This is often a difficult concept for those who are not in the real estate or banking business to grasp, so an amortization table that explains how each payment is applied to the debt over the life of the loan can be very helpful.

cash refinance

When a borrower refinances their mortgage for more than the current loan balance with the intention of withdrawing money for personal use, it is called an “cash refinance.” In other words, the mortgage is not simply for the house itself, but also finances an additional amount of money.

Appraised value

An opinion of the fair market value of a property, based on an appraiser’s knowledge, experience, and analysis of the property. The appraised value of the home is a key factor in how much the home can or will be mortgaged.

Appreciation

The increase in the value of a property due to changes in market conditions, inflation or other causes.

Depreciation

A decrease in property value; the opposite of appreciation.

Appreciation and depreciation are important concepts to remember; As we have just discussed, the appraised value of the home is a determining factor in the home mortgage. When refinancing, it’s important to understand that the value of your home may have appreciated or depreciated since the original or first mortgage was obtained.

Close

An agreement in which the lender guarantees a specified interest rate for a specified period of time at a specified cost.

lockout period

The period of time for which the lender has guaranteed an interest rate to a borrower.

This is a different concept than a fixed-rate mortgage, since a mortgage’s lock-in period can be temporary rather than for the life of the loan.

As we said earlier, you may already be familiar with many of these terms, but it doesn’t hurt to review them and see how they relate to your mortgage and refinancing process.

So now that you have these basic terms in mind when it comes to the mortgage and loan process, let’s take a closer look at the refinancing process.