Financing Basics

Simple Definitions:

• Principal: Outstanding balance of the loan amount
• Interest: Percent paid for use of money
• Taxes: Dollars assessed by the county
• Insurance (Hazard): Protects homeowners against loss of home due to fire, etc.
• PITI Payment: The total monthly mortgage payment combining Principle, Interest, Taxes, & Insurance.
• Mortgage Amount: Sales Price minus the Down Payment. (The amount the Purchaser is borrowing).
• Down Payment: The difference between the Sales Price and the Mortgage amount.
• LTV: Loan to Value.  The ratio between the Loan Amount & the Sales Price. (Mortgage Amount Sales Amount = LTV)
• Conventional: A Mortgage Loan neither insured by the FHA nor guaranteed by the VA.
• PMI: Private Mortgage Insurance.  Insurance written by a private company on conventional loans which protects the mortgage lender against loss from a borrower's default.  Required on loans with less than 20% down (Some exceptions).
• FHA-insured: Federal Housing Administration.  A division of the Department of Housing and Urban Development.  Insures residential mortgage loans made by private lenders.
• MIP: Mortgage Insurance Premium.  Required on all FHA loans regardless of the amount of the down payment.  A fee paid by the borrower for insurance against loss through default on an FHA loan.
• VA-guaranteed: Veterans Administration.  Provides partially guaranteed loans for the purchase of a home to eligible veterans and un-remarried widows or widows of veterans who died in service or service-connected causes.
• Funding Fee: A fee paid to the Veterans Administration for the VA to guarantee a veteran's loan.  This fee is waived if the Veteran has disability.
• Certificate of Eligibility: A certificate obtained by a veteran from a Veterans Administration office which states that the veteran is eligible for a VA insured loan.
• Point (Mortgage Discount): A point is equal to 1% of the mortgage amount.  A mortgage discount point is a one-time charge assessed at closing to lower the interest rate.  A charge of 1 point increases the lender's yield (above the note rate) by approximately 1/8%; 2 points increase the yield approximately 2/8%, etc. Example using 3 points: $95,000 x .03 = $2,850 discount dollars / Loan amount x points = discount dollars
• Par: No points.  (The benchmark from which other rates are calculated.)
• Closing Cost: Expenses of the sale that must be paid in addition to the purchase price, such as loan fees, title fees, appraisal fees, etc. 
• Loan Origination Fee: The finance fee charged by a lender for making a mortgage.  The origination fee is usually 1% of the mortgage amount.  This fee covers the work involved in the evaluation, preparation, and submission of the proposed mortgage loan.
• Closing: The conclusion of the real estate transaction.  When the seller delivers title to the buyer in exchange for payment by the buyer of the purchase price.  Also known as settlement.