Befuddled by mortgage market lingo? You’re not alone. Almost everyone has a tough time understanding the language.
My all-time favorite term is “tick,” which is a minimum up or down change in the interest rate charged on a home loan. A tick, then, is one 32nd of a point, a “point” being an amount equal to 1 percent of the amount being borrowed.
But not all points are created equally. There are points, and then there are points. Loan “discount” points are a one-time charge assessed by lenders at closing to increase their profit, or yield.
Discount points are tax-deductible. But “origination” points, which are the lender’s fee to prepare documents, make credit checks, inspect and sometimes appraise the property, cannot be written off.
You might also run across the term “basis” point, which is one 100th of 1 percent-50 basis points equal 0.5 percent-and is used to describe changes in the lender’s yield.
Another phrase you’ve probably been hearing a lot lately is “lock-in.” This refers to the period of time during which the lender guarantees a specific mortgage rate.
Typically, lenders will lock-in a rate for 45 days at no extra charge. But for an “extended lock,” or the promise to hold the rate for 60 days or longer, you’ll have to pay.
If a lender offers to allow you to “lock and shop,” it means you can get prequalified for a loan at a guaranteed rate and then go house-hunting.
You also may be able to purchase a “floatdown option,” which guarantees that if rates should fall instead of rise while your loan is in the “pipeline” (being processed, or waiting to be closed) the lender will lower your rate accordingly. With a lock-in and floatdown option, then, you’ll be covered coming and going.
Whenever a price war breaks out in the mortgage market, as is now the case, several expressions that are likely to pop up are “teaser rates,” “kamikaze pricing” and “beneath the screen.”
Teaser rates are low initially to attract borrowers but return to normal within a short period. Kamikaze pricing means rates are so low they can put the lender out of business, and beneath the screen means loans are offered at rates so low that they don’t show up on the lender’s computer.
Those who offer these kinds of rates are usually “portfolio,” or “in-house,” lenders. Translation: Banks that hold their loans as opposed to other lenders that sell the loans they “originate” to investors in the so-called secondary mortgage market.
Speaking of the secondary market, two other terms you’re sure to come across are “conforming” and “nonconforming.”
Technically, both refer to the multitude of requirements set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., or Fannie Mae and Freddie Mac, the two government-sponsored enterprises that purchase loans from local lenders and package them into securities for sale on Wall Street.
For the most part, however, the terms refer to the statutory limit-currently $203,150-on the size of the loan the two companies can purchase.
Loans at that amount or below are conforming loans. And because of Fannie Mae and Freddie Mac’s government connection, rates on conforming loans are usually anywhere from 25 to 50 basis points below those asked on non-conforming loans above $203,150, which also are called “jumbo” loans. “Super jumbo” loans, by the way, are those above $500,000.
Assuming you know the difference between fixed-rate loans and adjustables, let’s move on to “balloon” mortgages, which are short-term loans in which the principal and interest payments do not fully pay off the loan.
For example, you might take out a $100,000 balloon mortgage for seven years and make payments on as if it were a 30-year loan. After seven years, however, the entire balance is due.
Because balloons tend to pop-in this case, the final balloon payment invariably comes due at exactly the wrong moment-the mortgage market has come up with some ingenious twists on this concept.
Known by such various handles as “reduction option” loan, “renegotiable rate” mortgages, “convertibles” and “two-steps,” loans of this ilk allow the borrower to shift from one rate to another within a specified period of time. Sometimes it’s at the five- or seven-year point, and other times its between the 13th and 59th payment.
Actually, there all kinds of choices: You can jump from a fixed rate to another fixed rate, or from a fixed to an adjustable.
Another type of financing that may be of interest is a “bridge” loan, which is a short-term mortgage that allows move-up buyers who haven’t been able to unload their present residence to bridge the gap between the termination of their current mortgage and the start of the mortgage on their new house.
Think of it as “interim” or “gap” financing. That’s as opposed to “end” loans, “take out” loans or “permanent” financing, which are all terms used to describe the final mortgage on a piece of property.
These also are known as “first” mortgages, meaning the lender has a security right over all other mortgages on the property.
Consequently, a “junior” mortgage isn’t a loan for little Johnny’s tree house, it’s one that is subordinate to the claims of a prior lien. A second mortgage is junior to the first, for example, and a third is junior to both the first and second.
Finally, when you make your payments, you’ll want to take advantage of the “float,” which is that period between the day the money is due and the day the lender imposes a late charge.
To “play” the float, you’ll want to delay your payment until the last possible moment, thereby earning extra interest on your money. Lenders don’t like this, because then they can’t earn as much by waiting until the last minute to pass your money on to investors. That’s why lenders like you to allow them to automatically deduct your payment from your account on the day it’s due.
