Common Finance Terms
An Appraisal is an estimate of a property’s fair market value. It’s a document generally required (depending on the loan program) by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property. The Appraisal is performed by an “Appraiser” typically a state-licensed professional who is trained to render expert opinions concerning property values, its location, amenities, and physical conditions.
“Closing” is the last step of buying and financing a home, and when the property is officially transferred from the seller to the buyer. At Closing, all the parties in the mortgage loan transaction sign the necessary documents.
Closing can take anywhere from 1-hour to several, depending upon contingency clauses in the purchase offer, or any escrow instructions needing to be executed.
Prior to closing you should have a final inspection, or “walk-through” to insure requested repairs were performed, and items agreed to remain with the house are there such as drapes, lighting fixtures, etc.
In most states the settlement is completed by a title or escrow firm in which you forward all materials and information plus the appropriate cashier’s checks or bank wire so the firm can make the necessary disbursement. Your representative will deliver the check to the seller, and then give the keys to you.
Refinance is simply originating a new loan on your property. It’s generally a good time to refinance when mortgage rates are 2% lower than the current rate on your loan. It may be a viable option even if the interest rate difference is only 1% or less. Any reduction can trim your monthly mortgage payments.
Example: Your payment, excluding taxes and insurance, would be about $770 on a $100,000 loan at 8.5%; if the rate were lowered to 7.5%, your payment would then be $700, saving you $70 per month. Your savings depends on your income, budget, loan amount, and interest rate changes. Your lender can help you calculate your options.
A reverse mortgage allows borrowers age 55 or older to access part of the equity in their primary home without making payments. Accrued interest is simply applied toward the loan balance. If there is a current traditional loan balance on the home, the entire balance may be included in the reverse mortgage.
Popular uses for reverse mortgages:
– Provide a source of funds for senior living expenses
– Diversify sources of retirement income
– Hedge against risks such as market downturns and outliving savings
– Allow seniors to remain in their homes after retirement
– Provide a source of emergency funds
– Pay for in-home care
– A source of nontaxable income: (won’t increase your income tax rate or Medicare premiums)
In 1934, the Federal Housing Administration (FHA) was established to improve housing standards and to provide an adequate home financing system with mortgage insurance. This enables buyers that may have otherwise been excluded from the housing market to buy a home.
The FHA does not make home loans, it insures loans. Should a homebuyer default, the lender is paid from the FHA mortgage insurance fund.
Buy a house with as little as 3.5% down.
- Ideal for the first-time homebuyers unable to make larger down payments.
- The right mortgage solution for those who may not qualify for a conventional loan.
- Down payment assistance programs can be added to a FHA Loan for additional down payment and/or closing cost savings.
Private Mortgage Insurance (PMI)
On a conventional mortgage, when your down payment is less than 20% of the purchase price of the home mortgage lenders usually require you get Private Mortgage Insurance (PMI) to protect them in case you default on your mortgage. Sometimes you may need to pay up to 1-year’s worth of PMI premiums at closing which can cost several hundred dollars. The best way to avoid this extra expense is to make a 20% down payment, or ask about other loan program options.
Since reverse mortgages are non-recourse loans (homeowner is not obligated to pay any shortfall), most borrowers are required to get mortgage insurance to protect the lender from any such shortfalls.
The Veteran Administration’s Loan (VA Loan) originated in 1944 through the Servicemen’s Readjustment Act; also know as the GI Bill. It was signed into law by President Franklin D. Roosevelt and was designed to provide Veterans with a federally-guaranteed home loan with no down payment. VA loans are made by private lenders like banks, savings & loans, and mortgage companies to eligible Veterans for homes to live in. The lender is protected against loss if the loan defaults. Depending on the program option, the loan may or may not default.
For a traditional loan, it is when a homeowner is unable to make principal and/or interest payments on their mortgage. The lender, a bank or building society, can seize and sell the property as stipulated in the terms of the mortgage contract.
For a reverse mortgage, a foreclosure is possible if the borrower does not make their required property tax payments, maintain property insurance, pay applicable association dues, or maintain their home according to standard FHA guidelines.
Below is a list of documents that are typically required when you apply for a mortgage.
- Copy of signed sales contract including all riders
- Verification of the deposit you placed on the home
- Names, addresses and telephone numbers of all realtors, builders, insurance agents and attorneys involved
- Copy of Listing Sheet and legal description if available (if the property is a condominium please provide condominium declaration, by-laws and most recent budget)
- Copies of your pay-stubs for the most recent 30-day period and year-to-date
- Copies of your W-2 forms for the past two years
- Names and addresses of all employers for the last two years
- Letter explaining any gaps in employment in the past 2 years
- Work visa or green card (copy front & back)
If self-employed or receive commission or bonus, interest/dividends, or rental income:
- Provide full tax returns for the last two years PLUS year-to-date Profit and Loss statement (please provide complete tax return including attached schedules and statements. If you have filed an extension, please supply a copy of the extension.)
- K-1’s for all partnerships and S-Corporations for the last two years (please double-check your return. Most K-1’s are not attached to the 1040.)
- Completed and signed Federal Partnership (1065) and/or Corporate Income Tax Returns (1120) including all schedules, statements and addenda for the last two years. (Required only if your ownership position is 25% or greater.)
If you will use Alimony or Child Support to qualify:
- Provide divorce decree/court order stating amount, as well as, proof of receipt of funds for last year
If you receive Social Security income, Disability or VA benefits:
- Provide award letter from agency or organization
Source of Funds and Down Payment
- Sale of your existing home – provide a copy of the signed sales contract on your current residence and statement or listing agreement if unsold (at closing, you must also provide a settlement/Closing Statement)
- Savings, checking or money market funds – provide copies of bank statements for the last 3 months
- Stocks and bonds – provide copies of your statement from your broker or copies of certificates
- Gifts – If part of your cash to close, provide Gift Affidavit and proof of receipt of funds
- Based on information appearing on your application and/or your credit report, you may be required to submit additional documentation
Debt or Obligations
- Prepare a list of all names, addresses, account numbers, balances, and monthly payments for all current debts with copies of the last three monthly statements
- Include all names, addresses, account numbers, balances, and monthly payments for mortgage holders and/or landlords for the last two years
- If you are paying alimony or child support, include marital settlement/court order stating the terms of the obligation
- Check to cover Application Fee(s)
8 Simple Ways to Save Money
Saving is easier when you have a plan—follow these steps to create one
Sometimes the hardest thing about saving money is just getting started. This step-by-step guide can help you develop a simple and realistic strategy, so that you can save for all your short- and long-term goals.
1. Record your expenses
The first step to start saving money is figuring out how much you spend. Keep track of all your expenses—that means every coffee, household item and cash tip as well as regular monthly bills. Record your expenses however is easiest for you—a pencil and paper, a simple spreadsheet or a free online spending tracker or app. Once you have your data, organize the numbers by categories, such as gas, groceries and mortgage, and total each amount. Use your credit card and bank statements to make sure you’ve included everything.
2. Include Saving in Your Budget
Now that you know what you spend in a month, you can begin to create a budget. Your budget should show what your expenses are relative to your income, so that you can plan your spending and limit overspending. Be sure to factor in expenses that occur regularly but not every month, such as car maintenance. Include a savings category in your budget and aim to save an amount that initially feels comfortable to you. Plan on eventually increasing your savings by up to 15 to 20 percent of your income.
3. Find Ways to Cut Spending
If you can’t save as much as you’d like, it might be time to cut back on expenses. Identify nonessentials, such as entertainment and dining out, that you can spend less on. Look for ways to save on your fixed monthly expenses, such as your car insurance or cell phone plan, as well. Other ideas for trimming everyday expenses include:
Search for free activities
Use resources, such as community event listings, to find free or low-cost entertainment.
Review recurring charges
Cancel subscriptions and memberships you don’t use—especially if they renew automatically.
Examine the cost of eating out vs. cooking at home
Plan to eat most of your meals at home, and research local restaurant deals for nights that you want to treat yourself.
Wait before you buy
When tempted by a nonessential purchase, wait a few days. You may realize the item was something you wanted rather than needed—and you can develop a plan to save for it.
4. Set Savings Goals
One of the best ways to save money is to set a goal. Start by thinking about what you might want to save for—both in the short term (one to three years) and the long term (four or more years). Then estimate how much money you’ll need and how long it might take you to save it.
Common short-term goals: Emergency fund (three to nine months of living expenses), vacation or down payment for a car
Common long-term goals: Down payment on a home or a remodeling project, your child’s education or retirement
Set a small, achievable short-term goal for something that’s fun and goes beyond your monthly budget, such as a new smartphone or holiday gifts. Reaching smaller goals—and enjoying the reward you’ve saved for—can give you a psychological boost, making the payoff of saving more immediate and reinforces the habit.
5. Determine your financial priorities
After your expenses and income, your goals are likely to have the biggest impact on how you allocate your savings. For example, if you know you’re going to need to replace your car in the near future, you could start putting away money for one now. But be sure to remember long-term goals—it’s important that planning for retirement doesn’t take a back seat to shorter-term needs. Learning how to prioritize your savings goals can give you a clear idea of how to allocate your savings.
6. Pick the right tools
There are many savings and investment accounts suitable for short- and long-term goals. And you don’t have to pick just one. Look carefully at all the options and consider balance minimums, fees, interest rates, risk and how soon you’ll need the money so you can choose the mix that will help you best save for your goals.
If you’ll need the money soon or need to be able to access it quickly, consider using these FDIC-insured deposit accounts:
- A savings account
- A certificate of deposit (CD), which locks in your money for a fixed period of time at a rate that is typically higher than that of a savings account
If you’re saving for retirement or your child’s education, consider:
- FDIC-insured individual retirement accounts (IRAs) or 529 plans, which are tax-efficient savings accounts
- Securities, such as stocks or mutual funds. These investment products are available through investment accounts with a broker-dealer1
7. Make saving automatic
Almost all banks offer automated transfers between your checking and savings accounts. You can choose when, how much and where to transfer money or even split your direct deposit so that a portion of every paycheck goes directly into your savings account. The advantage: You don’t have to think about it, and you’re less likely to spend the money instead. Other easy savings tools include credit card rewards and spare change programs, which round up transactions to the nearest dollar and transfer the difference into a savings or investment account.
8. Watch your savings grow
Review your budget and check your progress every month. That will help you not only stick to your personal savings plan, but also identify and fix problems quickly. Understanding how to save money may even inspire you to find more ways to save and hit your goals faster.
1 Remember that securities are not insured by the FDIC, are not deposits or other obligations of a bank and are not guaranteed by a bank. They are subject to investment risks, including the possible loss of your principal.