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Financial Planning

Deed
A legal document for transferring title. Typically it is only signed by the seller and recorded at the county courthouse.

Discount Points
Discount points are a closing cost that allows you to buy down (reduce your interest rate) and lower the interest rate on a loan. Often a discount point will be 1% of the loan being given. It is wise to consider through the use of an amortization schedule to determine if buying a discount point makes sense.

Down Payment
Money that a borrower is putting towards the purchase of a home. Most often this is done with cash. However, based upon loan to value percentages, borrowers may be able to use existing equity as their down payment. An example is having a lot partially paid for when building a home.

Debt to Income Ratio
The percentage amount of payments being made in relationship to the amount of money a person is making. Besides having the ability to pay a loan back, the debt to income ratio show what is left to pay other bills and loans. If a lender feels this ratio is too high, they may determine that your debt burden with a new loan is too high. A typical ratio for all debt is about 36% of your income.

Here is a formula for calculation based upon a lender using the multiplier of 36%.

1. Amount of all reported gross monthly income before taxes __________.
2. Multiply this by 36% or by .36 __________.
3. Subtract all current monthly loan payments __________.
4. This is an estimate of allowable monthly payments __________.
Note: You may need to include taxes and insurance in this payment.

Earnest Money
Once was sometimes known as good faith money. It is usually used in an offer to purchase. The amount can be anywhere from $1 to the entire down payment . Typically it is held in a non interest bearing state approved account with an earnest money agreement in place.

Equity
The difference between how much a person’s asset is worth in comparison to what is owed on it.

Escrow Money
Funds that are placed into an established account to be used for future payments. Escrow Funds are used for closing costs of loans before a loan is complete. Escrow Money is also used for insurance payments, taxes, Private Mortgage Insurance, PMI and other annual property expenses. They can be paid once a month and accumulated towards paying an annual bill.

Fixed Rate Mortgage
A loan in which the interest rate is locked in over the lifespan of the mortgage. Typically they will offer slightly higher rates than an adjustable rate mortgage since the risk over the long term is increased for the lender and decreased for you.

Homeowner’s Insurance
An insurance policy that protects a person’s liability, along with hazard and fire insurance towards a person property and its contents. Often times a person may need additional riders for specific additional coverage. These can include flood insurance, builder risk policy and inland marine endorsements and more.

Interest
The actual fee that is being paid for the amount of money which is borrowed.

Lien
A legal claim on a piece of property to secure repayment of debt or money owed for services provided.

Lien Waiver
A signed document in which a party waives partial or all rights to place a lien against a piece of property.

Loan to Value Ratio
This is a percentage of how much money is borrowed in comparison to what the property or collateral is worth or being purchased for.

Locked Rate
This is the promised rate of interest you will pay upon your loan closing. It is usually only guaranteed for a specified number of days. Example: A 30 day lock would promise that rate quoted if the loan closes within 30 days.

Market Analysis
An estimate of the current value of a piece of property based upon how many days it can be sold through the use of other previous sold comparable properties that are closed. It most often is done by a real estate agent. This should not be confused with an appraisal that an appraiser produces.

Mortgage
A legal document that is stating that your property has been pledged as capital. These are generally recorded at the county courthouse.

Origination Fee
A closing cost that is charged by a lender to set up and process a mortgage or equity loan. Often times it is one point or one percent of the borrowed amount.

Point
A lenders way of saying one percent of the mortgage amount being borrowed

Pre-qualification
A financial estimate in order to determine how much money a lender would be willing to loan. The process may include credit reports, debt to income ratios and the type of loan you are considering to get.

Principle
The remaining balance on a loan or mortgage that is still due the lender.

Private Mortgage Insurance (PMI)
Insurance that is provided to the lender in the event the borrower would default on payment of the loan. Often times a lender will require this insurance when the borrower has less than 20% equity or money down towards a loan. NOTE: When the principle owed goes to a level below 80% to value, the lender and insurance company are not obligated to tell you so and will gladly accept your PMI payments that you are no longer required to make.

Term
Is the length of time, normally in years, over which the loan is paid back. Terms could also include other conditions of the loan.

Title
Is a document that shows who is the owner of a particular piece of property.

Title Insurance
An insurance policy that protects parties involved in a real estate and building transaction. Its primary protection is based upon a title company doing a title search to determine if there are any defects to title.

Title Search
A process in which the records to a piece of property are reviewed to determine ownership, liens and encumbrances and other issues that may affect ownership of real estate.

Lender Terminology and Definitions

Adjustable Rate Mortgage
An adjustable rate mortgage is a loan in which the interest rate can be adjusted over its lifespan. Typically they will offer lower rates than a fixed rate mortgage since the risk over the long term is reduced for the lender and increased for you. It is important to determine the caps for this type of mortgage.

Amortization
Amortization of a loan is the calculation of payments toward principle and interest over the life of the loan.

Appraisal
An appraisal is a written report that documents the current value of a property based upon how many days it can be sold through the use of other previous sold comparable properties that are closed. It's most often done with a licensed or certified appraiser. This should not be confused with Market Analysis that a real estate agent performs

Builder Risk Insurance
Builder risk insurance is taken out during the phase of new construction usually in addition to home owner’s insurance . It protects the materials on site before they are installed which are then protected by the home owner’s insurance.

Caps
Caps are the allowable limits in which the interest rate on an adjustable rate mortgage may be adjusted during the term of the loan. Typically, they will have both an amount and a period when the lender may adjust them. An example is caps of 2 and 5. This means that upon each term anniversary the interest rate can be adjusted by as much as 2% up or down, but with a limitation of a 5% maximum increase over the term of the loan.

Closing Costs
Closing costs apply to both selling a property as well as obtaining a loan. Typically they will include but not be limited to loan fees, origination points, discount points, appraisal cost , recording fees, title insurance cost, credit report , document preparation fees and possibly more. Get an estimate of what your fees are before applying for a loan

Commitment Letter
A commitment letter from a lender is the promise to lend money based upon terms and conditions that must be met. In many real estate transactions and builder agreements, there are requirements for a commitment letter to basically show proof of financing.

Credit Report
A credit report is a document that summarizes your credit history. It tracks borrowing, credit applied for and repayment of debt and bills. It is one of the largest tools next to disposable income that often determines if you will receive a loan or credit card. Your credit is very important and should be kept healthy. Sometimes no credit is almost as bad as poor credit because there is no history to help a lender determine your creditworthiness.

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