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Understanding Mortgage Terminology – Part 3

11/15/2011
Our third installment of our series on understanding mortgage terminology covers many of the advanced financial concepts brought up during a mortgage deal.  These terms are especially important for a first time home buyer to know, but you'll want to review the list even if you've been through a home purchase or a refinance before.

Yesterday we explored some more advanced concepts in mortgage terminology.  Today, we'll go through Mortgage Terminology Part Three and cover the final set of terms.

•    Secondary Mortgage Market – The secondary mortgage market is an industry itself in which existing mortgages are bought and sold.  This means the right to collect a mortgage may be passed from one investor to another during the life of the loan.

•    Amortization – Amortization refers to the payment of interest costs bit by bit over the length of the loan.  An amortization schedule is a timeline that details when interest costs are to be paid.

•    Negative Amortization – In a negative amortization situation, the borrower is unable to make a high enough monthly payment to pay off both the principle of the loan and the interest the principle is accruing day by day.  This unpaid interest becomes part of the loan balance.  Borrowers can get stuck in this vicious cycle if adequate funds aren't available.

•    Fully Amortized Loan – A fully amortized loan is one in which the principle and interest are paid for simultaneous from the beginning.  Not all loans function this way.  Many loans require the interest to be paid off before the principle is affected.

•    Acceleration Clause – A clause included in many mortgage contracts that makes the entire loan amount and all interest due immediately at the time of default.

•    Alienation Clause – A clause in some mortgage contracts that makes the entire loan amount due immediately if the property is sold.

•    Buy-Down – A buy-down occurs when a borrower pays points up front in order to decrease the interest rate or loan term.  The borrower is "buying down" the interest rate.

•    Prime Rate – The prime rate is the underlying market interest rate that the lowest mortgage rates are based on.  Adjustable rate mortgages vary based on the prime rate.

•    Private Mortgage Insurance – Private mortgage insurance or PMI insures the borrower against the possibility of default.  Borrowers who can't provide a high enough down payment at closing are often required to pay private mortgage insurance premiums.

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