- Acceleration Clause
- Allows the lender to speed up the rate at
which your loan comes due or even to demand
immediate payment of the entire outstanding
balance of the loan should you default on
you loan.
- Adjustable Rate Mortgage (ARM)
- A mortgage in which the interest rate is
adjusted periodically, based on a pre-selected
index. Also sometimes known as the renegotiable
rate mortgage, the variable rate mortgage
or the Canadian rollover mortgage.
- Adjustment Interval
- On an adjustable rate mortgage, the time
between changes in the interest rate and/or
monthly payment, typically one, three or
five years, depending on the index.
- 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.
- Appraisal
- An estimate of the value of property, made
by a qualified professional called an "appraiser."
- Assumption
- The agreement between buyer and seller where
the buyer takes over the payments on an existing
mortgage from the seller. Assuming a loan
can usually save the buyer money. Since this
is an existing mortgage debt, unlike a new
mortgage where closing costs and new, possibly
higher, market-rate interest charge will
apply.
- 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 are usually
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 guaranteed
by the VA or Farmers Home Administration
(FmHA).
- Credit Ratio
- The ratio, expressed as a percentage, which
results when a borrower's monthly payment
obligation on long-term debts is divided
by his or her net effective income (FHA/VA
loans) or gross monthly income (Conventional
loans). See Housing Expenses-to-Income Ratio.
- Deed of Trust
- In many states, this document is used in
place of a mortgage to secure the payment
of a note.
- Default
- Failure to meet legal obligations in a contract,
specifically, failure to make the monthly
payments on a mortgage.
- Deferred Interest
- See Negative Amortization.
- Delinquency
- Failure to make payments on time. This can
lead to foreclosure.
- 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)
- 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.
- Equity
- The difference between the fair market value
and current indebtedness, also referred to
as the owner's interest.
- 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 homebuyers pays money for tax or insurance
payments.
- Fannie Mae
- See Federal National Mortgage Association.
- Farmers Home Administration (FmHA)
- Provides financing to farmers and other qualified
borrowers who are unable to obtain loans
elsewhere.
- 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 standards
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 to 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.
- Foreclosure
- A legal procedure in which property securing
debt is sold by the lender to pay a defaulting
borrower's debt .
- Freddie Mac
- See Federal Home Loan Mortgage Corporation.
- Ginnie Mae
- See Government National Mortgage Association.
- Government National Mortgage Association
(GNMA)
- Also known as Ginnie Mae, provides sources of funds for residential
mortgages, insured or guaranteed by FHA or
VA.
- 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 taxes or expenses are deducted.
- Guarantee
- A promise by one party to pay a debt or perform
an obligation contracted by another, if the
original party fails to pay or perform according
to a contract.
- Hazard Insurance
- A form of insurance in which the insurance
company protects the insured from specified
losses, such as fire, windstorm and the like.
- 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).
- 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.
- Investor
- Money source for a lender.
- Jumbo Loan
- A loan which is larger (more than $240,000)
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
- 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.
- Market Value
- The highest price a buyer would pay and the
lowest price a seller would accept on a property.
Market value may be different from the price
a property could actually be sold for at
a given time.
- 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.
- Mortgagee
- The lender.
- Mortgagor
- The borrower or homeowner.
- 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 homebuyers
ends up owing more than the original amount
of the loan.
- Net Effective Income
- The borrower's gross income minus federal
income tax.
- Non-Assumption Clause
- A statement in a mortgage contract forbidding
the assumption of the mortgage without the
prior approval of the lender.
- 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.
- PITI
- Principal, interest, taxes, and insurance.
Also called monthly housing expense.
- Points
- See Discount Points
- 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.
- Principal
- The amount of debt, not counting interest.
- Private Mortgage Insurance (PMI)
- In the event that you do not have a 20 percent
down payment, 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.
- Realtor
- A real estate broker or an associate holding
active membership in a local real estate
board affiliated with the National Association
of Realtors.
- 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.
- Renegotiable Rate Mortgage (RRM)
- A loan in which the interest rate is adjusted
periodically. See Adjustable Rate Mortgage.
- Real Estate Settlement Procedures Act (RESPA)
- 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 Annuity Mortgage (RAM)
- A form of mortgage in which the lender makes
periodic payments to the borrower using the
borrower's equity in the home as security.
- 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.
- Settlement
- See Closing.
- Settlement Costs
- See Closing Costs.
- Shared Appreciation Mortgage (SAM)
- A mortgage in which a borrower receives a
below-market interest rate in return for
which a lender (or another investor such
as a family member or other partner) receives
a portion of the future appreciation in the
value of the property. May also apply to
mortgages where the borrower shares the monthly
principal and interest payments with another
party in exchange for a part of the appreciation.
- 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.
- Term Mortgage
- See Balloon Payment Mortgage.
- 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 fraction 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 homebuyers based on credit, employment,
assets, and other factors and the matching
of this risk to an appropriate rate and term
or loan amount.
- 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.
- Variable Rate Mortgage (VRM)
- See Adjustable Rate Mortgage.
- Verification of Deposit (VOD)
- A document signed by the borrower's financial
institution verifying the status and balance
of his/her financial accounts.
- Verification of Employment (VOE)
- A document signed by the borrower's employer
verifying his/her position and salary.
- Wraparound
- Results when an existing assumable loan is
combined with a new loan, resulting in an
interest rate somewhere between the old rate
and the current market rate. The payments
are made to a second lender or the previous
homeowner, who then forwards the payments
to the first lender after taking the additional
amount off the top.
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