January 4th, 2009
Adjustable Rate–An interest rate that changes
periodically in relation to an index. Payments may increase or
decrease according to the index at the time of adjustment.
Amortization–A repayment method in which the amount you
borrow is repaid gradually though regular monthly payments of
principal and interest. During the first few years, most of each
payment is applied toward the interest owed. During the final
years of the loan, payment amounts are applied almost
exclusively to the remaining principal.
Annual Percentage Rate (APR)–The cost of credit on a
yearly basis, expressed as a percentage. Required to be
disclosed by the lender under the federal Truth in Lending Act,
Regulation Z. Includes up-front costs paid to obtain the loan,
and is, therefore, usually a higher amount than the interest
rate stipulated in the mortgage note. Does not include title
insurance, appraisal, and credit report.
Application–An initial statement of personal and
financial information which is required to approve your loan.
Application Fee–Fees that are paid upon application. An
application fee may frequently include charges for property
appraisal ($200-$400) and a credit report ($30-50).
Appraisal–A fee charged by an appraiser to render an
opinion of market value as of a specific date. This is required
by most lenders to obtain a loan.
ARM: Adjustable Rate Mortgage; a mortgage
loan subject to changes in interest rates; when rates change,
ARM monthly payments increase or decrease at intervals
determined by the lender; the Change in monthly -payment amount,
however, is usually subject to a Cap. (See Variable)
Assumption of Mortgage–The agreement of a purchaser
to become primarily liable for the payments on a mortgage loan.
Unless otherwise specified by the lender, the seller may remain
secondarily liable for payments.
Balloon Mortgage: a mortgage that typically
offers low rates for an initial period of time (usually 5, 7, or
10) years; after that time period elapses, the balance is due or
is refinanced by the borrower.
Bankruptcy: a federal law whereby a person’s assets
are turned over to a trustee and used to pay off outstanding
debts; this usually occurs when someone owes more than they have
the ability to repay.
Borrower: a person who has been approved to
receive a loan and is then obligated to repay it and any
additional fees according to the loan terms.
Cap–The maximum allowable increase, for either
payment or interest rate, for a specified amount of time on an
adjustable rate mortgage.
Cash Out–Receiving money back when refinancing your
Cash reserves: a cash amount sometimes
required to be held in reserve in addition to the down payment
and closing costs; the amount is determined by the lender.
Ceiling–The maximum allowable interest rate over the
life of the loan of an adjustable rate mortgage.
Closing Costs–Any fees paid by the borrowers or sellers
during the closing of the mortgage loan. This normally includes
an origination fee, discount points, attorney’s fees, title
insurance, survey, and any items which must be prepaid, such as
taxes and insurance escrow payments.
Conforming Loan–Generally, a mortgage loan under
$417,000. Qualifying ratios and underwriting methods are
standardized to a large degree.
Condominium: a form of ownership in which
individuals purchase and own a unit of housing in a multi-unit
complex; the owner also shares financial responsibility for
Contract of Sale–The agreement between the buyer and
seller on the purchase price, terms, and conditions necessary to
both parties to convey the title to the buyer.
Credit history: history of an individual’s
debt payment; lenders use this information to gauge a potential
borrower’s ability to repay a loan.
Credit report: a record that lists all past and
present debts and the timeliness of their repayment; it
documents an individual’s credit history.
Credit bureau score: a number representing
the possibility a borrower may default; it is based upon credit
history and is used to determine ability to qualify for a
mortgage loan. Information is obtained from the three credit
bureaus: Equifax, Transunion, and Experian
Debt Ratio or Debt to income ratio –The ratio of the
total amount of credit card, auto, mortgage or other debt upon
which you must pay versus the amount of gross income you bring
Debt Service –The total amount of credit card, auto,
mortgage or other debt upon which you must pay.
Deed of Trust–Used in many western states, the agreement
used to pledge your home or other real estate as security for a
loan. Similar to a mortgage.
Default: the inability to pay monthly
mortgage payments in a timely manner or to otherwise meet the
Delinquency: failure of a borrower to make timely
mortgage payments under a loan agreement.
Discount Points (or Points)–The amount paid either to
maintain or lower the interest rate charged. Each point is equal
to one percent (1%) of the loan amount (i.e., two points on a
$100,000 mortgage would equal $2,000).
Down Payment–The difference between the purchase price
and that portion of the purchase price being financed. Most
lenders require the down payment to be paid from the buyer’s own
funds. Gifts from related parties are sometimes acceptable, and
must be disclosed to the lender.
Due on Sale–A clause in a mortgage agreement providing
that, if the mortgagor (the borrower) sells, transfers, or, in
some instances, encumbers the property, the mortgagee (the
lender) has the right to demand the outstanding balance in full.
Effective Interest Rate–The cost of credit on a yearly
basis expressed as a percentage. Includes up-front costs paid to
obtain the loan, and is, therefore, usually a higher amount than
the interest rate stipulated in the mortgage note. Useful in
comparing loan programs with different rates and points.
Encumbrance–A claim against a property by another party
which usually affects the ability to transfer ownership of the
Equity–The difference between the fair market value
(appraised value) of your home and your outstanding mortgage
Escrow account: a separate account into which the
lender puts a portion of each monthly mortgage payment; an
escrow account provides the funds needed for such expenses as
property taxes, homeowners insurance, mortgage insurance, etc.
Fannie Mae: Federal National Mortgage
Association (FNMA); a federally-chartered enterprise owned by
private stockholders that purchases residential mortgages and
converts them into securities for sale to investors; by
purchasing mortgages, Fannie Mae supplies funds that lenders may
loan to potential homebuyers.
First Mortgage–A mortgage which is in first lien
position, taking priority over all other liens (which are
Fixed Rate–An interest rate which is fixed for the term
of the loan. Payments as well are fixed at one amount.
FHA Loan–More appropriately termed “FHA Insured Loan.” A
loan for which the Federal Housing Administration insures the
lender against losses the lender may incur due to your default.
Fixed-rate mortgage: a mortgage with payments that
remain the same throughout the life of the loan because the
interest rate and other terms are fixed and do not change.
Flood insurance: insurance that protects
homeowners against losses from a flood; if a home is located in
a flood plain; the lender will require flood insurance before
approving a loan.
Foreclosure: a legal process in which
mortgaged property is sold to pay the loan of the defaulting
Freddie Mac: Federal Home Loan Mortgage Corporation
(FHLM); a federally-chartered corporation that purchases
residential mortgages, securitizes them, and sells them to
investors; this provides lenders with funds for new homebuyers.
Ginnie Mae: Government National Mortgage Association
(GNMA); a government-owned corporation overseen by the U.S.
Department of Housing and Urban Development, Ginnie Mae pools
FHA-insured and VA-guaranteed loans to back securities for
private investment; as With Fannie Mae and Freddie Mac, the
investment income provides funding that may then be lent to
eligible borrowers by lenders.
Good Faith Estimate–A written estimate of closing
costs which a lender must provide you within three days of
submitting an application.
Grace Period–A period of time during which a loan
payment may be paid after its due date but not incur a late
penalty. Such late payments may be reported on your credit
Gross Income–For qualifying purposes, the income of the
borrower before taxes or expenses are deducted.
Home Equity Line of Credit–A loan providing you with the
ability to borrow funds at the time and in the amount you
choose, up to a maximum credit limit for which you have
qualified. Repayment is secured by the equity in your home.
Simple interest (interest-only payments on the outstanding
balance) is usually tax-deductible. Often used for home
improvements, major purchases or expenses, and debt
Home Equity Loan–A fixed or adjustable rate loan
obtained for a variety of purposes, secured by the equity in
your home. Interest paid is usually tax -deductible. Often used
for home improvement or freeing of equity for investment in
other real estate or investment. Recommended by many to replace
or substitute for consumer loans whose interest is not
tax-deductible, such as auto or boat loans, credit card debt,
medical debt, and education loans.
Hazard Insurance–A contract between purchaser and an
insurer, to compensate the insured for loss of property due to
hazards (fire, hail damage, etc.), for a premium.
Home inspection: an examination of the structure and
mechanical systems to determine a home’s safety; makes the
potential homebuyer aware of any repairs that may be needed.
HUD I Settlement Statement–A form utilized at loan
closing to itemize the costs associated with purchasing the
home. Used universally by mandate of HUD, the Department of
Housing and Urban Development.
Index–A number, usually a percentage, upon which future
interest rates for adjustable rate mortgages are based. Common
indexes include the Cost of Funds for the Eleventh Federal
District of banks or the average rate of a one year Government
Inflation: the number of dollars in circulation exceeds
the amount of goods and services available for purchase;
inflation results in a decrease in the dollar’s value.
Interest Rate–The periodic charge, expressed as a
percentage, for use of credit.
Jumbo Loan–Mortgage loans over $417,000. Terms and
underwriting requirements may vary from conforming loans.
Loan to Value Ratio (LTV)–A ratio determined by dividing
the sales price or appraised value into the loan amount,
expressed as a percentage. For example, with a sales price of
$100,000 and a mortgage loan of $80,000, your loan to value
ratio would be 80%. Loans with an LTV over 80% may require
Private Mortgage Insurance, defined below.
Lock or Lock In–A commitment you obtain from a lender
assuring you a particular interest rate or feature for a
definite time period. Provides protection should interest rates
rise between the time you apply for a loan, acquire loan
approval, and, subsequently, close the loan and receive the
funds you have borrowed.
Margin–An amount, usually a percentage, which is added
to the index to determine the interest rate for adjustable rate
Minimum Payment–The minimum amount that you must pay,
usually monthly, on a home equity loan or line of credit. In
some plans, the minimum payment may be “interest only,” (simple
interest). In other plans, the minimum payment may include
principal and interest (amortized).
Mortgage Banker–Originates mortgage loans, loaning you
their funds and closing the loan in their name.
Mortgage Broker–As do mortgage bankers, takes loan
application and processes the necessary paperwork. Unlike a
mortgage banker, brokers do not fund the loan with their own
money, but work on behalf of several investors, such as mortgage
bankers, S and L’s, banks, or investment bankers.
Mortgage Insurance (MIP or PMI)–Insurance purchased by
the borrower to insure the lender or the government against loss
should you default. MIP, or Mortgage Insurance Premium, is paid
on government-insured loans (FHA or VA loans) regardless of your
LTV (loan-to-value). Should you pay off a government-insured
loan in advance of maturity, you may be entitled to a small
refund of MIP. PMI, or Private Mortgage Insurance, is paid on
those loans which are not government-insured and whose LTV is
greater than 80%. When you have accumulated 20% of your home’s
value as equity, your lender may waive PMI at your request.
Please note that such insurance does not constitute a form of
life insurance which pays off the loan in case of death.
Mortgage Loan–A loan which utilizes real estate as
security or collateral to provide for repayment should you
default on the terms of your loan. The mortgage or Deed of Trust
is your agreement to pledge your home or other real estate as
Mortgagee–The lender in a mortgage loan transaction.
Mortgagor–The borrower in a mortgage loan transaction.
Negative Amortization–Amortization in which the payment
made is insufficient to fund complete repayment of the loan at
its termination. Usually occurs when the increase in the monthly
payment is limited by a ceiling. The portion of the payment
which should be paid is added to the remaining balance owed. The
balance owed may increase, rather than decrease over the life of
PITI–Principal, interest, taxes and insurance, which
comprise your monthly mortgage payment.
Points–The amount paid either to maintain or lower the
interest rate charged. Each point is equal to one percent (1%)
of the loan amount (i.e., two points on a $100,000 mortgage
would equal $2,000).
Prepayment Penalty–A fee paid to the lending institution
for paying a loan off prior to the scheduled maturity date. A
prepayment penalty may also be charged for paying over a certain
percentage of the total loan balance in a given year. This
varies from lender to lender.
Principal: the amount borrowed from a lender;
doesn’t include interest or additional fees.
Qualifying Ratios–Comparisons of a borrower’s debts
and gross monthly income. (See Debt Ratio)
RESPA: Real Estate Settlement Procedures Act; a law
protecting consumers from abuses during the residential real
estate purchase and loan process by requiring lenders to
disclose all settlement costs, practices, and relationships
Right to Rescission–The legal right to void or cancel
your mortgage contract in such a way as to treat the contract as
if it never existed. Right of rescission is not applicable to
mortgages made to purchase a home, but may be applicable to
other mortgages, such as home equity loans. Length of right to
rescission varies from lender and state, but is typically 3
Security Interest–An interest that a lender takes in the
borrower’s property to assure repayment of a debt.
Servicing a Loan–The ongoing process of collecting your
monthly mortgage payment, including accounting for and payment
of your yearly tax and/or homeowners insurance bills.
Title–The written evidence that proves the right of
ownership of a specific piece of property.
Title Insurance–Protection for lenders or homeowners
against financial loss resulting from legal defects in the
Transaction Fee–A fee which may be charged each time you
draw on a home equity credit line.
Truth-in-Lending: a federal law obligating a
lender to give full written disclosure of all fees, terms, and
conditions associated with the loan initial period and then
adjusts to another rate that lasts for the term of the loan.
Underwriting–The process of verifying data and
approving a loan.
USDA Rural Development Loan– A loan backed by the
USDA that allows for 102% financing and NO MONEY DOWN.
Variable Rate–An interest rate that changes periodically
in relation to an index. Payments may increase or decrease
VA Loan–More appropriately termed “VA Insured Loan.” A
loan for which the Veteran’s Administration insures the lender
against losses the lender may incur due to your default.
Available only to veterans possessing a Certificate of
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