On the Money Dictionary: Monday, Sept. 8
Three C's: Credit, Capacity, Collateral – The three main things lenders are looking for. Good mortgages require good credit (a score of 760 or higher will get you the best interest rate). You also need capacity, meaning proof that you can pay back the loan, and collateral, which is the ability to put a 20% down payment on the home. Read more from Carmen here.
Rule of 15 – How to determine if it’s better to buy or rent. Find the going rent in the neighborhood you’re interested in, calculate how much you’d spend in a year and then multiply that number by 15. If the number is much greater than the annual rent, the value of the home probably has room to go down and you should stick to renting. Read more from Carmen here.
Subprime Loan - Risky home loans given to people with below-standard credit who are unable to qualify under the traditional criteria.
Jumbo Loan – A loan given above the maximum loan amount set by Fannie Mae and Freddie Mac. Jumbos often have a higher interest rate and a higher risk for the lenders
Conforming Loan – A loan that follows the guidelines set by Fannie Mae and Freddie Mac, including a set maximum loan amount, down payment and credit requirements.
Equity – When referring to a home, the difference between the home’s value and the outstanding amount of the mortgage. As the mortgage is paid off, home equity increases.
Negative Equity – When the debt on a home exceeds the home’s value. People who are referred to as being “upside down” in their mortgage have negative equity.
HELOC (Home Equity Line of Credit) – When a lender agrees to lend a fixed amount for an agreed upon period, as opposed to lending the entire amount up front. HELOCs operate like credit cards in that the credit line is revolving, but unlike credit cards the debt is secured by the equity in the borrower’s home.
Mortgage Points - Charges a borrower must pay to secure a mortgage. Each point is usually a fee based on 1% of the total loan amount.
Closing Costs – Charges a borrower pays on top of a loan. Typical closing costs are title service costs, mortgage application fees and appraisal fees.
Appraisal – The market value of a home as determined by a certified or licensed appraiser.
PMI (Private Mortgage Insurance) – What a borrower must pay to a lender as collateral in the event they cannot pay back their mortgage.
"Underwater" - Owing more one a home than it is worth. The combination of higher interest rates and deteriorating home values is increasing the number of home owners who are “underwater” and contributing to the housing market decline.
Amortization – The elimination of a debt, specifically a mortgage, over a period of time as it is paid off.
Credit Score – A number determined by credit bureaus through analysis of a person’s credit files to evaluate the risk that person will not pay their debts back on time. The FICO score is the score used by most mortgage lenders, and ranges between 300 (worst) and 850 (best). Read more from John Ulzheimer here.
Debt-To-Income Ratio – The amount of money you earn as compared to what you owe in debt. For example, if you take home $2500 per month and have expenses (bills) of $900 per month, your DTI is 36%.
Debt Utilization Ratio - How much of your available credit you are using. For example, if you have $10,000 in credit and $2,000 in outstanding credit card debt, your utilization ratio is 20%.