Mortgage Forebearance Agreement
An agreement made between a mortgage lender and delinquent borrower in which the lender agrees not to exercise its legal right to foreclose on a mortgage and the borrower agrees to a mortgage plan that will, over a certain time period, bring the borrower current on his or her payments. A forbearance agreement is not a long-term solution for delinquent borrowers; it is designed for borrowers who have temporary financial problems caused by unforeseen problems such as temporary unemployment or health problems.
Borrowers with more fundamental financial problems - such as having chosen an adjustable rate mortgage on which the interest rate has reset to a level that makes the monthly payments unaffordable - must usually seek remedies other than a forbearance agreement.
Adjustable-Rate Mortgage (ARM)
A type of mortgage in which the interest rate paid on the outstanding balance varies according to a specific benchmark. The initial interest rate is normally fixed for a period of time after which it is reset periodically, often every month. The interest rate paid by the borrower will be based on a benchmark plus an additional spread, called an ARM margin.
An adjustable rate mortgage is also known as a "variable-rate mortgage" or a "floating-rate mortgage".
Both 2/28 and 3/27 mortgages are examples of ARMs. A 2/28 mortgage's initial interest rate is fixed for a period of two years and then resets to a floating rate for the remaining 28 years of the mortgage. A 3/27 mortgage is typically the same as a 2/28 mortgage, except that the interest rate is fixed for three years and then floats for the remaining 27 years of the mortgage.
A type of adjustable-rate mortgage (ARM) frequently offered to subprime borrowers. These mortgages are designed as short-term financing vehicles that give borrowers time to repair their credit until they are able to refinance into a mortgage with more favorable terms.
3/27 mortgages have a three-year fixed-interest-rate period after which the interest rate begins to float based on an index plus a margin (known as the fully indexed interest rate). There is a high probability that the fully indexed interest rate will be substantially higher than the initial three-year fixed interest rate; therefore, to avoid payment shock, the intent of 3/27 mortgage borrowers is to be able to refinance the mortgage before the interest rate begins to adjust.
A common mistake many 3/27 mortgage borrowers make is a failure to recognize the risks associated with such a mortgage. Many times they do not recognize how much their monthly payments may increase if the interest rate changes. Even if they plan on refinancing before the interest rate starts to move, they fail to foresee future economic conditions that might make refinancing difficult.
For example, the rate of home price appreciation and home equity play a very important role in a borrower's ability to refinance at a future date. Many borrowers are too optimistic about the rate of home price appreciation. Additionally, many 3/27 mortgages carry prepayment penalties, which make refinancing very costly.
A debt instrument that is secured by the collateral of specified real estate property and that the borrower is obliged to pay back with a predetermined set of payments. Mortgages are used by individuals and businesses to make large purchases of real estate without paying the entire value of the purchase up front.
Mortgages are also known as "liens against property" or "claims on property".
In a residential mortgage, a home buyer pledges his or her house to the bank. The bank has a claim on the house should the home buyer default on paying the mortgage. In the case of a foreclosure, the bank may evict the home's tenants and sell the house, using the income from the sale to clear the mortgage debt.
Assumable Mortgage
A type of financing arrangement in which the outstanding mortgage and its terms can be transfered from the current owner to a buyer. By assuming the previous owner's remaining debt, the buyer can avoid having to obtain his or her own mortgage.
Buyers are typically attracted to homes with existing assumable mortgages during times of rising interest rates. This is because they can assume the seller's mortgage, which was created when interest rates were lower, and use it to finance their purchase.
However, if the home's purchase price exceeds the mortgage balance by a significant amount, the buyer will either need to provide a sizable down payment or obtain a new mortgage anyway. For example, if a buyer is purchasing a home for $250,000, and the seller's assumable mortgage only has a balance of $110,000, the buyer would need a down payment of $140,000 to cover the difference, or would have to get a separate mortgage to secure the needed funds
A provision in a mortgage contract that requires that the mortgage be repaid in full upon a sale or conveyance of interest in the property that secures the mortgage. Mortgages with a due-on-sale clause are not assumable.
A due-on-sale clause helps to protect the lender, or the ultimate holder of the mortgage, from the risk that the mortgage may be transferred to the new owner of a property when the rate on the mortgage is below current market interest rates. This would extend the life of the mortgage; the holders of a below-market-interest-rate mortgage - or a mortgage-backed security, asset-backed security, or collateralized debt obligation backed by a below-market-interest-rate mortgage - generally favor the early retirement of that mortgage.
A provision in a mortgage contract that allows the seller of a home to pass responsibility to the buyer of the home for the existing mortgage. In other words, the new homeowner assumes the existing mortgage. There are typically many conditions and a fee required in an assumption clause.
An assumption clause can be an attractive selling point for a homeowner if the interest rate on the existing mortgage is lower than current market interest rates. In addition, loan settlement costs for the buyer can be avoided. However, there are many hurdles to get over in an assumption. For example, most mortgages have due-on-sale clauses which prevent assumptions, and the remaining principal balance of the existing mortgage is likely to less than the sales price of the home.
Down Payment
A type of payment made in cash during the onset of the purchase of an expensive good/service. The payment typically represents only a percentage of the full purchase price; in some cases it is not refundable if the deal falls through. Financing arrangements are made by the purchaser to cover the remaining amount owed to the seller.
Making a down payment and then paying the rest of the price through installments is a method that makes expensive assets more affordable for the typical person.
For example, because houses are extremely expensive assets, home buyers typically pay down payments that equal 5-25% of the total value of a home. The remaining 75-95% of the price will be covered by a bank or other financial institutions through a mortgage loan.
Closing Costs
The expenses (over and above the price of the property) that buyers and sellers normally incur to complete a real estate transaction. Costs incurred include loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed-recording fees and credit report charges.
Also known as "settlement costs".
Closing costs are separated into two categories: nonrecurring closing costs and prepaid costs. Nonrecurring costs are one-time costs associated with buying a property or obtaining a loan. Prepaid costs are those that recur over time, such as property taxes and homeowners' insurance. These costs are estimated by the lender on what is called a "good-faith estimate", which the lender must issue to the borrower within three days of a home loan application.
