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Understanding Loan Terminology and Types: A Comprehensive Guide for Borrowers

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Navigate the complex world of lending with our detailed overview of key loan terminology and types. Learn about principal, interest rates, loan duration, amortization, equity, and more. Discover how loan-to-value ratios, mortgage insurance, and various loan types such as term loans, amortized loans, and balloon loans impact your borrowing experience. We also provide an overview of loan programs like VA and FHA to help you choose the right financing option. This guide is essential for anyone looking to make informed borrowing decisions.

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Understanding Loan Terminology and Types: A Comprehensive Guide for Borrowers

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  1. Lending Practices ______________________________

  2. I. Loan Terminology: • Principal • Interest Rates • Duration of Loan • Debt Service • Amortization • Equity – the difference between the value of the property and the outstanding debt.

  3. Points– one percent of the loan amount. • Origination fee– fee lender charges for making loan usually stated in terms of a percentage of loan amount. • Discount points– lender’s charge to raise the return on the loan usually stated as a percentage of the loan amount. [Should you pay discount points or not?]

  4. Loan-to-Value • The relationship between the amount the lender is willing to loan and the market value of the property. • Market value = $100,000 Loan = $80,000What is the loan-to-value ratio? 80%

  5. Mortgage Insurance • Private Mortgage Insurance • PMI • Insures lenders against losses

  6. II. Loan Types • Term loan– interest payments only until due. • Amortized loan– regular equal payments for life of loan including both principal & interest. • Budget Mortgage • Balloon loan– any loan that has a final payment larger than any of the previous. • Partially amortized loan– series of amortized payments with a balloon payment at maturity. [Should pay mortgage off early?]

  7. Repaying a 6-year, $1,000 Loan

  8. 9% Interest per Year on the Loan

  9. Balance Owed Each Year of the Loan

  10. Amortization Table: Monthly Payment per $1,000 of Loan

  11. Balance Owing on a $1,000 Amortized Loan

  12. III. Loan Programs • Conventional • VA • FHA

  13. VA / FHA Comparison FHA VA Guarantees loans Funding fee Veterans only Rate negotiable Points No down payment 100% L-T-V Insures loans UFMIPAnyone qualified Rate negotiable Points 3-5% down 97-95% L-T-V

  14. VA / FHA Similarities • Owner occupied • 1-4 family dwellings • Refinancing allowed • Assumption allowed (with approval)

  15. Loan Limits Info • VA • http://www.homeloans.va.gov/ • FHA • https://entp.hud.gov/idapp/html/hicostlook.cfm • Conv • http://www.fanniemae.com/aboutfm/loanlimits.jhtml?p=About+Fannie+Mae&s=Loan+Limits

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