- 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.
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- 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.
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- 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.
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- 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.
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- 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.
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- 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.
(Return
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- 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.
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- 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).
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- 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.
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- Jumbo
Loan
- A loan which is larger 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.
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- 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.
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- 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.
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- 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.
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- 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.
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- 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.
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- 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.
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- 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.
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- 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.
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- 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.
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- 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.
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- 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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