Mortgage Basics

Below we have included basic mortgage information that may be helpful for you in understanding the mortgage process and terminology. Don't worry, as our lending specialists will guide you through the entire process.

A mortgage loan is money borrowed using a home as collateral for the loan. The money is typically used to purchase the home, but a mortgage loan can also provide cash for other purchases. The loan requires a contractual agreement stating the loan will be paid back with interest, in specified monthly payments over a stated period of time.

You choose the payment term—the longer the term, the lower the monthly payment, but the more you'll pay in total interest. The interest paid on a mortgage loan is usually tax-deductible (consult your tax advisor).

An American Bank mortgage professional can answer your questions, help you select the best financing for your needs, prepare closing cost estimates, calculate payment schedules, and help determine your price range for a home.

How Much Can I Afford?

Your monthly payments, including loan payment, property taxes and insurance, should be between 25-30% of your gross monthly income. We can help determine your price range for a home by reviewing your income, debts, and credit. This mortgage calculator is a good place to start.

An American Bank lender can easily get you pre-qualified for your loan at no cost, so you are confident in your search for your new home.

Closing Costs

Closing costs are costs associated with the mortgage loan. Examples of these costs include credit report, appraisal, legal and loan work, and document recording costs. You may also choose to pay points to reduce your interest rate. (A point is a one-time charge that equals 1% of the amount you borrow.)

You are typically required to contribute some of your own money toward the purchase of a home (down payment). The amount of down payment can be as low as 3% of the purchase price for a conventional loan. The mortgage loan officer will verify that you have accumulated these funds prior to the final purchase date (closing).

The Mortgage Process

In order to complete the application and ensure prompt approval, the mortgage professional will need the following information:
  • Most recent year-to-date pay stub(s) documenting one full month earnings and last two years W-2(s).
  • Depository/investment account statements for most recent two months (assets).
  • Loan and credit card account names, required (liabilities).
  • Residential addresses for prior two years.
  • Landlord's name/address for prior two years.
  • Names and addresses of each employer for the past two years.
  • Copy of divorce decree (if applicable).
  • Estimated value of personal property (automobiles, furniture, boats, etc.).
  • If self-employed or commissioned earnings, the last two years' personal and business tax returns and year-to-date profit and loss statements.

The information you supply at the time of application will be verified and a credit report and appraisal will be obtained. The appraisal will be performed to determine the market value of the home that will be used as collateral.

Approval times are based upon the documents you supply at the time of application and the time it takes to receive an appraisal (typically does not exceed 10 business days). If you begin a mortgage application on-line and do not complete the information, the incomplete application will be deleted after two weeks.

Mortgage Definitions

Adjustable-Rate Mortgage (ARM): A mortgage carrying an interest rate that adjusts according to the movements of a given index. Adjustable-rate mortgages start with lower interest rates than fixed-rate mortgages, but may fluctuate over time.

Amortization: The gradual reduction of a loan or other obligation by periodic payments of principal or interest.

Annual Percentage Rate (APR): The true cost of credit on a yearly basis. Expressed as a percentage, the APR results from an equation that considers the amount financed, the finance charge, and the terms of the loan. The APR is usually expressed in terms of the effective annual simple interest rate.

Appraisal: The process by which a qualified professional evaluates property to determine the market value of the home that will be used for collateral.

Asset: Anything owned that has commercial or exchange value. Assets may consist of specific property or of claims against others, versus obligations due to others (liabilities).

Balloon Payment: The balance of payment due, paid in a lump sum, usually after 2 to 7 years of monthly payments.

Closing: The final purchase date on a mortgage loan.

Closing costs: Up-front fees paid to a financial institution to cover costs associated with a mortgage loan. Examples of these costs include credit report, appraisal, legal and loan work, and document recording costs.

Collateral note: A promissory note that pledges certain property to secure a loan.

Construction loan: A short-term loan, to a builder or developer to finance the costs of construction. The lender generally requires repayment from the proceeds of the borrower's permanent mortgage loan. The lender may make periodic payments to the borrower as the construction work progresses.

Conventional mortgage: A mortgage that is neither guaranteed nor insured by a government agency. Most conventional mortgages are paid off in equal monthly installments over 15, 25, or 30 years.

Deed: A written instrument, executed and delivered according to law, used to transfer title to property.

Down payment: Money contributed by the borrower.

Equal Housing Lender: A disclosure or symbol that notifies consumers that the financial institution does not discriminate against an applicant because of age, sex, marital status, religion, race, color, national origin, or receipt of income from public assistance programs, or the fact that the applicant has exercised any rights under the federal consumer credit laws.

Escrow: The holding of funds, documents, securities, or other property by an impartial third party for the other two participants in a business transaction. When the transaction is completed, the escrow agent releases the entrusted property.

First-time home buyer programs: In Wisconsin, mortgage loan programs designed for those who are purchasing their first home or for those who have not owned a home in the past three years. Applicant must meet eligibility requirements to qualify. Programs may vary from state-to-state.

Fixed-rate loan: A loan that allows the borrower to "lock-in" their interest rate for the life of the contract, regardless of fluctuating market conditions.
Home equity line of credit: A variable-rate revolving line of credit secured by a home or residence.

Home equity loan: A fixed-rate term loan secured by a home or residence.

Joint account: A bank relationship in the names of two or more parties. Joint accounts may carry rights of survivorship.

Lien: A legal claim or attachment filed on record, against property as security for the payment of an obligation.

Line of credit: An expression of the maximum amount of credit a bank is willing to lend to a borrower.

Mortgage loan: Real estate credit, usually extended on a long-term basis, with the mortgaged property as security.

Note: A written promise to pay a specific amount either on demand or at a future date.

Points: A one-time charge that equals 1% of the amount borrowed. Points are often purchased to lower the interest rate on the loan.

Pre-qualification: A program that allows a prospective borrower to know the amount of credit that could be extended to them to purchase property.

Prime rate: A benchmark or guideline interest rate that a bank establishes from time to time and uses in calculating an appropriate rate for a particular loan contract.

Principal: (1) The sum of money stated in an account, a contract, or a financial instrument; for example, the amount of a loan or debt exclusive of interest. (2) The primary borrower on a loan or other obligation. (3) A person who appoints another party to act for him or her as agent. (4) The property of an estate. (5) The individual with primary ownership or management control of a business.

Promissory note: A written promise committing the issuer to pay a certain sum of money to the payee, with or without interest, on demand or on a fixed or determinable future date.

Refinancing: (1) To retire existing loans or notes by changing their terms or by making new borrowing arrangements. (2) To retire existing securities by selling new issues.

Revolving credit: A line of credit that permits the borrower to withdraw funds or charge purchases up to a specified dollar limit. The outstanding balance may fluctuate at various times from zero up to the maximum amount. Also referred to as open-end credit.

Secured loan: A borrower's obligation that includes the pledging of some form of collateral to protect the lender in case of default.

Serviced locally: The financial institution maintains the loan servicing.