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Adjustable Rate Mortgage (ARM) Is a mortgage in which the interest rate is adjusted periodically based on a preselected index. Also sometimes known as the renegotiable rate mortgage, the variable rate mortgage or the Canadian rollover mortgage.
Amortization Means loan payment by equal periodic payments calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance.
Annual Percentage Rate (APR) An interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage, because it takes into account points and other credit costs. The APR allows homebuyers to compare different types of mortgages based on the annual cost for each loan.
Application The first step in the official loan approval process; this form is used to record important information about the potential borrower necessary to the underwriting process.
Appraisal An estimate of the value of property, made by a qualified professional called an "appraiser."
Balloon (Payment) Mortgage Usually a short-term fixed-rate loan which involves small payments for a certain period of time and one large payment for the remaining amount of the principal at a time specified in the contract.
Broker An individual in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money himself. Brokers usually charge a fee or receive a commission for their services.
Buydown When the lender and/or the home builder subsidizes the mortgage by lowering the interest rate during the first few years of the loan. While the payments are initially low, they will increase when the subsidy expires.
Caps (Interest) Consumer safeguards which limit the amount the interest rate on an adjustable rate mortgage may change per year and/or the life of the loan.
Caps (Payment) Consumer safeguards which limit the amount monthly payments on an adjustable rate mortgage may change.
Closing The meeting between the buyer, seller and lender or their agents where the property and funds legally change hands. Also called settlement.
Closing Costs Usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. The costs of closing usually are about 3 percent to 6 percent of the mortgage amount.
Commitment An agreement, often in writing, between a lender and a borrower to loan money at a future date subject to the completion of paperwork or compliance with stated conditions.
Construction Loan A short term interim loan for financing the cost of construction. The lender advances funds to the builder at periodic intervals as the work progresses.
Conventional Loan A mortgage not insured by FHA or guarantee by the VA or Farmers Home Administration (FmHA).
Deed of Trust In many states, this document is used in place of a mortgage to secure the payment of a note.
Department of Veterans Affairs (VA) An independent agency of the federal government which guarantees long-term, low- or no-down payment mortgages to eligible veterans.
Discount Points Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount (e.g. two points on a $100,000 mortgage would cost $2,000).
Down Payment Money paid to make up the difference between the purchase price and mortgage amount. Down payments usually are 10 percent to 20 percent of the sales price on Conventional loans, and no money down up to 5 percent on FHA and VA loans.
Due-On-Sale Clause A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home.
Earnest Money Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.
Equal Credit Opportunity Act (ECOA) Is a federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status or receipt of income from public assistance programs.
Escrow Refers to a neutral third party who carries out the instructions of both the buyer and seller to handle all the paperwork of settlement or "closing." Escrow may also refer to an account held by the lender into which the homebuyer pays money for tax or insurance payments.
Fannie Mae See Federal National Mortgage Association. Fannie Mae Link
Fair Housing Act A law that prohibits discrimination in all facets of the homebuying process on the basis of race, color, national origin, religion, sex, familial status, or disability.
Fair Market Value The hypothetical price that a willing buyer and seller will agree upon when they are acting freely, carefully, and with complete knowledge of the situation.
Federal Home Loan Mortgage Corporation (FHLMC) Also called Freddie Mac, is a quasi-governmental agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers.
Federal Housing Administration (FHA) A division of the Department of Housing and Urban Development. Its main activity is the insuring of residential mortgage loans made by private lenders. FHA also sets standard for underwriting mortgages.
Federal National Mortgage Association (FNMA) Also known as Fannie Mae. A tax-paying corporation created by Congress that purchases and sells conventional residential mortgages as well as those insured by FHA or guaranteed by VA. This institution, which provides funds for one in seven mortgages, makes mortgage money more available and more affordable.
FHA Loan A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans, they are generous enough to handle moderate-priced homes almost anywhere in the country.
FHA Mortgage Insurance Requires a small fee (up to 3 percent of the loan amount) paid at closing or a portion of this fee added to each monthly payment of an FHA loan to insure the loan with FHA. On a 9.5 percent $75,000 30-year fixed-rate FHA loan, this fee would amount t o either $2,250 at closing or an extra $31 a month for the life of the loan. In addition, FHA mortgage insurance requires an annual fee of 0.5 percent of the current loan amount, the more years the fee must be paid.
Fixed-Rate Mortgage A mortgage on which the interest rate is set for the term of the loan. Also called a conventional mortgage.
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 procedure in which property securing debt is sold by the lender to pay a defaulting borrower's debt .
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 See Government National Mortgage Association. Ginnie Mae Link
Good Faith Estimate An estimate of all closing fees including pre-paid and escrow items as well as lender charges; must be given to the borrower within three days after submission of a loan application.
Government National Mortgage Association (GNMA) Also known as Ginnie Mae, provides sources of funds for residential mortgages, insured or guaranteed by FHA or VA. A government-owned agency which buys mortgages from lending institutions, securitizes them, and then sells them to investors. Because the payments to investors are guaranteed by the full faith and credit of the U.S. Government, they return slightly less interest than other mortgage-backed securities.
Graduated Payment Mortgage (GPM) A type of flexible-payment mortgage where the payments increase for a specified period of time and then level off. This type of mortgage has negative amortization built into it.
Gross Monthly Income The total amount the borrower earns per month, before any expenses are deducted.
HELP Homebuyer Education Learning Program; an educational program from the FHA that counsels people about the homebuying process; HELP covers topics like budgeting, finding a home, getting a loan, and home maintenance; in most cases, completion of the program may entitle the homebuyer to a reduced initial FHA mortgage insurance premium of the home purchase price.
Hazard Insurance A form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm and the like.
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.
Home warranty offers protection for mechanical systems and attached appliances against unexpected repairs not covered by homeowner's insurance; ,overage extends over a specific time period and does not cover the home's structure.
Homeowner's insurance An insurance policy that combines protection against damage to a dwelling and Is contents with protection against claims of negligence )r inappropriate action that result in someone's injury or )property damage.
Housing counseling agency provides counseling and assistance to individuals on a variety of issues, including loan default, fair housing, and homebuying.
Housing Expenses-to-Income Ratio The ratio, expressed as a percentage, which results when a borrower's housing expenses are divided by his/her net effective income (FHA/VA loans) or gross monthly income (Conventional loans).
HUD The U.S. Department of Housing and Urban Development; established in 1965, HUD works to create a decent home and suitable living environment for all Americans; it does this by addressing housing needs, improving and developing American communities, and enforcing fair housing laws.
HUD1 Statement also known as the "settlement sheet," it itemizes all closing costs; must be given to the borrower at or before closing.
Impound That portion of a borrower's monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as reserves.
Index A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one- three-, and five-year U.S. Treasury Security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average Costs-of-Funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down.
Jumbo Loan A loan which is larger (more than $650,000) than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.
Lien A claim upon a piece of property for the payment or satisfaction of a debt or obligation.
Loan-To-Value Ratio (LTV)The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.
Margin The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.
Mortgage A lien on the property that secures the Promise to repay a loan.
Mortgage Banker A company that originates loans and resells them to secondary mortgage lenders like :Fannie Mae or Freddie Mac.
Mortgage Broker A firm that originates and processes loans for a number of lenders.
Mortgage Insurance Money paid to insure the mortgage when the down payment is less than 20 percent. See Private Mortgage Insurance or FHA Mortgage Insurance.
Mortgage insurance premium (MIP) A monthly payment -usually part of the mortgage payment - paid by a borrower for mortgage insurance.
Mortgage Modification A loss mitigation option that allows a borrower to refinance and/or extend the term of the mortgage loan and thus reduce the monthly payments.
Negative Amortization Occurs when your monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid balance of the loan. The danger of negative amortization is that the homebuyer ends up owing more than the original amount of the loan.
Origination Fee The fee charged by a lender to prepare loan documents, make credit checks, inspect and sometimes appraise a property; usually computed as a percentage of face value of the loan. (Return to the top of the page.)
PITI Principal, interest, taxes, and insurance. Also called monthly housing expense.
Points See Discount Points Points are fees the borrower pays the lender at the time the loan is closed, expressed as a percent of the loan. On a $100,000 loan, 2 points means a payment of $2,000. Points are part of the cost of credit to the borrower, and part of the investment return to the lender.
Power of Attorney A legal document authorizing one person to act on behalf of another.
Prepaids Expenses necessary to create an escrow account or to adjust the seller's existing escrow account. Can include taxes, hazard insurance, private mortgage insurance and special assessments.
Prepayment A privilege in a mortgage permitting the borrower to make payments in advance of their due date.
Prepayment Penalty Money charged for an early repayment of debt. Prepayment penalties are allowed in some form (but not necessarily imposed) in 36 states and the District of Columbia.
Pre-Qualify A lender informally determines the maximum amount an individual is eligible to borrow.
Private Mortgage Insurance (PMI) In the event that you do not have a 20 percent down payments, lenders will allow a smaller down payment-as low as 5 percent in some cases. With the smaller down payments loans, however, borrowers are usually required to carry private mortgage insurance. Private mortgage insurance will require an initial premium payment of 1.0 percent to 5.0 percent of your mortgage amount and may require an additional monthly fee depending on your loan's structure. On a $75,000 house with a 10 percent down payments, this would mean either an initial premium payment of $2,025 to $3,375, or an initial premium of $675 to $1,130 combined with a monthly payment of $25 to $30.
Recision The cancellation of a contract. With respect to mortgage refinancing, the law that gives the homeowner three days to cancel a contract in some cases once it is signed if the transaction uses equity in the home as security.
Recording Fees Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records.
Refinancing Paying off one loan by obtaining another; refinancing is generally done to secure better loan terms (like a lower interest rate).
RESPA Real Estate Settlement Procedures Act RESPA is a federal law that allows consumers to review information on known or estimated settlement costs once after application and once prior to or at settlement. The law requires lenders to furnish information after application only.
Reverse Mortgage An arrangement in which a homeowner borrows against the equity in his/her home and receives regular monthly tax-free payments from the lender. also called reverse-annuity mortgage or home equity conversion mortgage.
Servicing All the steps and operations a lender perform to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, property inspections and the like.
Survey A measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any building.
Title A document that gives evidence of an individual's ownership of property.
Title Insurance A policy, usually issued by a Title Insurance company, which insures a homebuyer against errors in the title search. The cost of the policy is usually a function of the value of the property, and is often borne by the purchaser and/or seller.
Title Search An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company.
Truth-in-Lending A federal law requiring disclosure of the Annual Percentage Rate to homebuyers shortly after they apply for the loan.
Two-Step Mortgage A mortgage in which the borrower receives a below-market interest rate for a specified number of years (most often seven or 10 years), and then receives a new interest rate adjusted (within certain limits) to market conditions at that time. The lender sometimes has the option to call the loan, due within 30 days notice at the end of seven or 10 years. Also called "Super Seven" or "Premier" mortgage.
Underwriting The decision whether to make a loan to a potential homebuyer based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount. (Return to the top of the page.)
VA Loan A long-term, low-or no-down payment loan guaranteed by the Department of Veterans Affairs. Restricted to individuals qualified by military service or other entitlements.
VA Mortgage Funding Fee A premium of up to 2 percent (depending on the size of the down payment) paid on a VA-backed loan. On a $75,000 30-year fixed-rate mortgage with no down payment, this would amount to $1,406 either paid at closing or added to the amount financed.
