Today’s post is another installment in our series on mortgage terminology. The reason we’re focusing on mortgage terms is obvious: many, if not most, home buyers obtain a mortgage loan when they buy their home. The mortgage industry has all sorts of trade terms and lingo which are likely to be unfamiliar to the typical buyer. To make the buying experience easier, it’s best if buyers enter the situation with knowledge of at least a few basic mortgage terms. In this post, we will provide definitions for 3 more pieces of mortgage lingo.
An appraisal is a formal examination of a home, required by lenders, which creates an approximation of the home’s value. An appraisal will consist of an in-depth inspection of the home to assess its quality, as well as an analysis of the wider market in which the home is located. Appraisals will often make use of multiple professionals or specialists (i.e. market analysts, inspectors, construction professionals, etc.).
An origination fee is a fee paid to the lender at the time a mortgage loan is created (hence its name). It is a “one time” fee, it doesn’t recur or show up at any other time. Lenders have to do quite a bit of work in order to launch a new mortgage loan; the origination fee covers this work which is done when the loan is initiated. In calculating annual percentage rate, the origination fee is one of the costs which is lumped together and spread over the course of the loan.
The term “second mortgage” refers to a loan taken out on a home on which the owner is already paying off a (primary) mortgage loan. A second mortgage utilizes the equity which has been built up by a homeowner; the lender gives the loan with the knowledge that the loan could be repaid with the proceeds which would remain following a sale and primary mortgage loan payoff. There are two types of secondary mortgage loans: home equity loans and home equity lines of credit (HELOC).
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