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Acceleration
Clause
Provision in a mortgage that allows the lender to demand payment
of the entire principal balance if a monthly payment is missed
or some other default occurs.
Additional
Principal Payment
A way to reduce the remaining balance on the loan by paying
more than the scheduled principal amount due.
Adjustable-Rate
Mortgage (ARM)
A mortgage with an interest rate that changes during the life
of the loan according to movements in an index rate. Sometimes
called AMLs (adjustable mortgage loans) or VRMs (variable-rate
mortgages).
Adjusted
Basis
The cost of a property plus the value of any capital expenditures
for improvements to the property minus any depreciation taken.
Adjustment
Date
The date that the interest rate changes on an adjustable-rate
mortgage (ARM).
Adjustment
Period
The period elapsing between adjustment dates for an adjustable-rate
mortgage (ARM).
Affordability
Analysis
An analysis of a buyers ability to afford the purchase of
a home. Reviews income, liabilities, and available funds,
and considers the type of mortgage you plan to use, the area
where you want to purchase a home, and the closing costs that
are likely.
Amortization
The gradual repayment of a mortgage loan, both principal and
interest, by installments.
Amortization
Term
The length of time required to amortize the mortgage loan
expressed as a number of months. For example, 360 months is
the amortization term for a 30-year fixed-rate mortgage.
Annual
Percentage Rate (APR)
The cost of credit, expressed as a yearly rate including interest,
mortgage insurance, and loan origination fees. This allows
the buyer to compare loans, however APR should not be confused
with the actual note rate.
Appraisal
A written analysis prepared by a qualified appraiser and estimating
the value of a property.
Appraised
Value
An opinion of a property's fair market value, based on an
appraiser's knowledge, experience, and analysis of the property.
Asset
Anything owned of monetary value including real property,
personal property, and enforceable claims against others (including
bank accounts, stocks, mutual funds, etc.).
Assignment
The transfer of a mortgage from one person to another.
Assumability
An assumable mortgage can be transferred from the seller to
the new buyer. Generally requires a credit review of the new
borrower and lenders may charge a fee for the assumption.
If a mortgage contains a due-on-sale clause, it may not be
assumed by a new buyer.
Assumption
Fee
The fee paid to a lender (usually by the purchaser of real
property) when an assumption takes place.
Balance
Sheet
A financial statement that shows assets, liabilities, and
net worth as of a specific date.
Balloon
Mortgage
A mortgage with level monthly payments that amortizes over
a stated term but also requires that a lump sum payment be
paid at the end of an earlier specified term.
Balloon
Payment
The final lump sum paid at the maturity date of a balloon
mortgage.
Before-tax
Income
Income before taxes are deducted.
Biweekly
Payment Mortgage
A plan to reduce the debt every two weeks (instead of the
standard monthly payment schedule). The 26 (or possibly 27)
biweekly payments are each equal to one-half of the monthly
payment required if the loan were a standard 30-year fixed-rate
mortgage. The result for the borrower is a substantial savings
in interest.
Bridge
Loan
A second trust that is collateralized by the borrower's present
home allowing the proceeds to be used to close on a new house
before the present home is sold. Also known as "swing
loan."
Broker
An individual or company that brings borrowers and lenders
together for the purpose of loan origination.
Buydown
When
the seller, builder or buyer pays an amount of money up front
to the lender to reduce monthly payments during the first
few years of a mortgage.Buydowns can occur in both fixed and
adjustable rate mortgages.
Cap
Limits how much the interest rate or the monthly payment can
increase, either at each adjustment or during the life of
the mortgage. Payment caps don't limit the amount of interest
the lender is earning and may cause negative amortization.
Certificate
of Eligibility
A document issued by the federal government certifying a veteran’s
eligibility for a Department of Veterans Affairs (VA) mortgage.
Certificate
of Reasonable Value (CRV)
A document issued by the Department of Veterans Affairs (VA)
that establishes the maximum value and loan amount for a VA
mortgage.
Change
Frequency
The frequency (in months) of payment and/or interest rate
changes in an adjustable-rate mortgage (ARM).
Closing
A meeting held to finalize the sale of a property. The buyer
signs the mortgage documents and pays closing costs. Also
called "settlement."
Closing
Costs
These are expenses - over and above the price of the property-
that are incurred by buyers and sellers when transferring
ownership of a property. Closing costs normally include an
origination fee, property taxes, charges for title insurance
and escrow costs, appraisal fees, etc. Closing costs will
vary according to the area country and the lenders used.
Compound
Interest
Interest paid on the original principal balance and on the
accrued and unpaid interest.
Consumer
Reporting Agency (or Bureau)
An organization that handles the preparation of reports used
by lenders to determine a potential borrower's credit history.
The agency gets data for these reports from a credit repository
and from other sources.
Conversion
Clause
A provision in an ARM allowing the loan to be converted to
a fixed-rate at some point during the term. Usually conversion
is allowed at the end of the first adjustment period. The
conversion feature may cost extra.
Credit
Report
A report detailing an individual's credit history that is
prepared by a credit bureau and used by a lender to determine
a loan applicant's creditworthiness.
Credit
Risk Score
A credit score measures a consumer’s credit
risk relative to the rest of the U.S. population, based on
the individual’s credit usage history. The credit score
most widely used by lenders is the FICOŽ score, developed
by Fair, Issac and Company. This 3-digit number, ranging from
300 to 850, is calculated by a mathematical equation that
evaluates many types of information that are on your credit
report. Higher FICOŽ scores represents lower credit risks,
which typically equate to better loan terms. In general, credit
scores are critical in the mortgage loan underwriting process.
Deed
of Trust
The document used in some states instead of a mortgage. Title
is conveyed to a trustee.
Default
Failure to make mortgage payments on a timely basis or to
comply with other requirements of a mortgage.
Delinquency
Failure to make mortgage payments on time.
Deposit
This is a sum of money given to bind the sale of real estate,
or a sum of money given to ensure payment or an advance of
funds in the processing of a loan.
Discount
In an ARM with an initial rate discount, the lender gives
up a number of percentage points in interest to reduce the
rate and lower the payments for part of the mortgage term
(usually for one year or less). After the discount period,
the ARM rate usually increases according to its index rate.
Down
Payment
Part of the purchase price of a property that is paid in cash
and not financed with a mortgage.
Effective
Gross Income
A borrowers normal annual income, including overtime that
is regular or guaranteed.Salary is usually the principal source,
but other income may qualify if it is significant and stable.
Equity
The amount of financial interest in a property. Equity is
the difference between the fair market value of the property
and the amount still owed on the mortgage.
Escrow
An item of value, money, or documents deposited with a third
party to be delivered upon the fulfillment of a condition.
For example, the deposit of funds or documents into an escrow
account to be disbursed upon the closing of a sale of real
estate.
Escrow
Disbursements
The use of escrow funds to pay real estate taxes, hazard insurance,
mortgage insurance, and other property expenses as they become
due.
Escrow
Payment
The part of a mortgagor’s monthly payment that is held
by the servicer to pay for taxes, hazard insurance, mortgage
insurance, lease payments, and other items as they become
due.
Fannie
Mae
A congressionally chartered, shareholder-owned company that
is the nation's largest supplier of home mortgage funds.
FHA
Mortgage
A mortgage that is insured by the Federal Housing Administration
(FHA). Also known as a government mortgage.
FICO
Score
FICOŽ scores are the most widely used credit score in U.S.
mortgage loan underwriting. This 3-digit number, ranging from
300 to 850, is calculated by a mathematical equation that
evaluates many types of information that are on your credit
report. Higher FICOŽ scores represent lower credit risks,
which typically equate to better loan terms.
First
Mortgage
The primary lien against a property.
Fixed
Installment
The monthly payment due on a mortgage loan including payment
of both principal and interest.
Fixed-Rate
Mortgage (FRM)
A mortgage interest that are fixed throughout the entire term
of the loan.
Fully
Amortized ARM
An adjustable-rate mortgage (ARM) with a monthly payment that
is sufficient to amortize the remaining balance, at the interest
accrual rate, over the amortization term.
GNMA
A government-owned corporation that assumed responsibility
for the special assistance loan program formerly administered
by Fannie Mae. Popularly known as Ginnie Mae.
Growing-Equity
Mortgage (GEM)
A fixed-rate mortgage that provides scheduled payment increases
over an established period of time. The increased amount of
the monthly payment is applied directly toward reducing the
remaining balance of the mortgage.
Guarantee
Mortgage
A
mortgage that is guaranteed by a third party.
Housing
Expense Ratio
The percentage of gross monthly income budgeted to pay housing
expenses.
HUD-1
statement
A document that provides an itemized listing of the funds
that are payable at closing. Items that appear on the statement
include real estate commissions, loan fees, points, and initial
escrow amounts. Each item on the statement is represented
by a separate number within a standardized numbering system.
The totals at the bottom of the HUD-1 statement define the
seller's net proceeds and the buyer's net payment at closing.
Hybrid
ARM (3/1 ARM, 5/1 ARM, 7/1 ARM)
A combination fixed rate and adjustable rate loan
- also called 3/1,5/1,7/1 - can offer the best of both worlds.
A lower interest rates (like ARMs) and a fixed payment for
a longer period of time than most adjustable rate loans. For
example, a "5/1 loan" has a fixed monthly payment
and interest for the first five years and then turns into
a traditional adjustable rate loan, based on then-current
rates for the remaining 25 years. It's a good choice for people
who expect to move or refinance, before or shortly after,
the adjustment occurs.
Index
The index is the measure of interest rate changes a lender
uses to decide the amount an interest rate on an ARM will
change over time.The index is generally a published number
or percentage, such as the average interest rate or yield
on Treasury bills. Some index rates tend to be higher than
others and some more volatile.
Initial
Interest Rate
This refers to the original interest rate of the mortgage
at the time of closing. This rate changes for an adjustable-rate
mortgage (ARM). It's also known as "start rate"
or "teaser."
Installment
The regular periodic payment that a borrower agrees to make
to a lender.
Insured
Mortgage
A mortgage that is protected by the Federal Housing Administration
(FHA) or by private mortgage insurance (MI).
Interest
The fee charged for borrowing money.
Interest
Accrual Rate
The percentage rate at which interest accrues on the mortgage.
In most cases, it is also the rate used to calculate the monthly
payments.
Interest
Rate Buydown Plan
An arrangement that allows the property seller to deposit
money to an account. That money is then released each month
to reduce the mortgagor's monthly payments during the early
years of a mortgage.
Interest
Rate Ceiling
For an adjustable-rate mortgage (ARM), the maximum interest
rate, as specified in the mortgage note.
Interest
Rate Floor
For
an adjustable-rate mortgage (ARM), the minimum interest rate,
as specified in the mortgage note.
Late
Charge
The penalty a borrower must pay when a payment is made a stated
number of days (usually 15) after the due date.
Lease-Purchase
Mortgage Loan
An alternative financing option that allows low- and moderate-income
home buyers to lease a home with an option to buy. Each month's
rent payment consists of principal, interest, taxes and insurance
(PITI) payments on the first mortgage plus an extra amount
that accumulates in a savings account for a downpayment.
Liabilities
A person's financial obligations. Liabilities include long-term
and short-term debt.
Lifetime
Payment Cap
For
an adjustable-rate mortgage (ARM), a limit on the amount that
payments can increase or decrease over the life of the mortgage.
Lifetime
Rate Cap
For an adjustable-rate mortgage (ARM), a limit on the amount
that the interest rate can increase or decrease over the life
of the loan. See cap.
Line
of Credit
An agreement by a commercial bank or other financial institution
to extend credit up to a certain amount for a certain time.
Liquid
Asset
A cash asset or an asset that is easily converted into cash.
Loan
A sum of borrowed money (principal) that is generally repaid
with interest.
Loan-to-Value
(LTV) Percentage
The relationship between the principal balance of the mortgage
and the appraised value (or sales price if it is lower) of
the property. For example, a $100,000 home with an $80,000
mortgage has an LTV of 80 percent.
Lock-In
Period
The guarantee of an interest rate for a specified period of
time by a lender, including loan term and points, if any,
to be paid at closing. Short term locks (under 21 days), are
usually available after lender loan approval only. However,
many lenders may permit a borrower to lock a loan for 30 days
or more prior to submission of the loan application.
Margin
The number of percentage points the lender adds to the index
rate to calculate the ARM interest rate at each adjustment.
Maturity
The date on which the principal balance of a loan becomes
due and payable.
Monthly
Fixed Installment
That portion of the total monthly payment that is applied
toward principal and interest. When a mortgage negatively
amortizes, the monthly fixed installment does not include
any amount for principal reduction and doesn't cover all of
the interest. The loan balance therefore increases instead
of decreasing.
Mortgage
A legal document that pledges a property to the lender as
security for payment of a debt.
Mortgage
Banker
A company that originates mortgages exclusively for resale
in the secondary mortgage market.
Mortgage
Broker
An individual or company that brings borrowers and lenders
together for the purpose of loan origination.
Mortgage
Insurance
A contract that insures the lender against loss caused by
a mortgagor's default on a government mortgage or conventional
mortgage. Mortgage insurance can be issued by a private company
or by a government agency.
Mortgage
Insurance Premium (MIP)
The amount paid by a mortgagor for mortgage insurance.
Mortgage
Life Insurance
A type of term life insurance In the event that the borrower
dies while the policy is in force, the debt is automatically
paid by insurance proceeds.
Mortgagor
The borrower in a mortgage agreement.
Negative
Amortization
Amortization means that monthly payments are large enough
to pay the interest and reduce the principal on your mortgage.
Negative amortization occurs when the monthly payments do
not cover all of the interest cost. The interest cost that
isn't covered is added to the unpaid principal balance. This
means that even after making many payments, you could owe
more than you did at the beginning of the loan. Negative amortization
can occur when an ARM has a payment cap that results in monthly
payments not high enough to cover the interest due.
Net
Worth
The value of all of a person's assets, including cash.
Non
Liquid Asset
An asset that cannot easily be converted into cash.
Note
A legal document that obligates a borrower to repay a mortgage
loan at a stated interest rate during a specified period of
time.
Origination
Fee
A fee paid to a lender for processing a loan application.
The origination fee is stated in the form of points. One point
is 1 percent of the mortgage amount.
Owner
Financing
A property purchase transaction in which the party selling
the property provides all or part of the financing.
Payment
Change Date
The date when a new monthly payment amount takes effect on
an adjustable-rate mortgage (ARM) or a graduated-payment mortgage
(GPM). Generally, the payment change date occurs in the month
immediately after the adjustment date.
Periodic
Payment Cap
A limit on the amount that payments can increase or decrease
during any one adjustment period.
Periodic
Rate Cap
A limit on the amount that the interest rate can increase
or decrease during any one adjustment period, regardless of
how high or low the index might be.
PITI
Reserves
A cash amount that a borrower must have on hand after making
a down payment and paying all closing costs for the purchase
of a home. The principal, interest, taxes, and insurance (PITI)
reserves must equal the amount that the borrower would have
to pay for PITI for a predefined number of months (usually
three).
Points
A point is equal to one percent of the principal amount of
your mortgage. For example, if you get a mortgage for $165,000
one point means $1,650 to the lender.Points usually are collected
at closing and may be paid by the borrower or the home seller,
or may be split between them.
Prepayment
Penalty
A fee that may be charged to a borrower who pays off a loan
before it is due.
Pre-Approval
The process of determining how much money you will be eligible
to borrow before you apply for a loan.
Prime
Rate
The interest rate that banks charge to their preferred customers.Changes
in the prime rate influence changes in other rates, including
mortgage interest rates.
Principal
The amount borrowed or remaining unpaid. The part of the monthly
payment that reduces the remaining balance of a mortgage.
Principal
Balance
The outstanding balance of principal on a mortgage not including
interest or any other charges.
Principal,
Interest, Taxes, and Insurance (PITI)
The four components of a monthly mortgage payment. Principal
refers to the part of the monthly payment that reduces the
remaining balance of the mortgage. Interest is the fee charged
for borrowing money. Taxes and insurance refer to the monthly
cost of property taxes and homeowners insurance, whether these
amounts that are paid into an escrow account each month or
not.
Private
Mortgage Insurance (PMI)
Mortgage insurance provided by a private mortgage insurance
company to protect lenders against loss if a borrower defaults.
Most lenders generally require MI for a loan with a loan-to-value
(LTV) percentage in excess of 80 percent.
Qualifying
Ratios
Calculations used to determine if a borrower can qualify for
a mortgage. They consist of two separate calculations: a housing
expense as a percent of income ratio and total debt obligations
as a percent of income ratio.
Rate
Lock
A commitment issued by a lender to a borrower or other mortgage
originator guaranteeing a specified interest rate and lender
costs for a specified period of time.
Real
Estate Agent
A
person licensed to negotiate and transact the sale of real
estate on behalf of the property owner.
Real
Estate Settlement Procedures Act (RESPA)
A consumer protection law that requires lenders to give borrowers
advance notice of closing costs.
RealtorŽ
A real estate broker or an associate who is an active member
in a local real estate board that is affiliated with the National
Association of Realtors.
Recording
The noting in the registrar’s office of the details of
a properly executed legal document, such as a deed, a mortgage
note, a satisfaction of mortgage, or an extension of mortgage,
thereby making it a part of the public record.
Refinance
Paying off one loan with the proceeds from a new loan using
the same property as security.
Revolving
Liability
A credit arrangement, such as a credit card, that allows a
customer to borrow against a preapproved line of credit when
purchasing goods and services.
Secondary
Mortgage Market
Where existing mortgages are bought and sold.
Security
The
property that will be pledged as collateral for a loan.
Seller
Carry-back
An agreement in which the owner of a property provides financing,
often in combination with an assumable mortgage. See owner
financing.
Servicer
An organization that collects principal and interest payments
from borrowers and manages borrowers’ escrow accounts.
The servicer often services mortgages that have been purchased
by an investor in the secondary mortgage market.
Standard
Payment Calculation
The method used to determine the monthly payment required
to repay the remaining balance of a mortgage in substantially
equal installments over the remaining term of the mortgage
at the current interest rate.
Step-Rate
Mortgage
A mortgage that allows for the interest rate to increase according
to a specified schedule (i.e., seven years), resulting in
increased payments as well. At the end of the specified period,
the rate and payments will remain constant for the remainder
of the loan.
Third-party
Origination
When a lender uses another party to completely or partially
originate, process, underwrite, close, fund, or package the
mortgages it plans to deliver to the secondary mortgage market.
Total
Expense Ratio
Total obligations as a percentage of gross monthly income
including monthly housing expenses plus other monthly debts.
Treasury
Index
An
index used to determine interest rate changes for certain
adjustable-rate mortgage (ARM) plans. Based on the results
of auctions that the U.S. Treasury holds for its Treasury
bills and securities or derived from the U.S. Treasury's daily
yield curve, which is based on the closing market bid yields
on actively traded Treasury securities in the over-the-counter
market.
Truth-in-Lending
A federal law that requires lenders to fully disclose, in
writing, the terms and conditions of a mortgage, including
the annual percentage rate (APR) and other charges.
Two-step
Mortgage
An adjustable-rate mortgage (ARM) with one interest rate for
the first five or seven years of its mortgage term and a different
interest rate for the remainder of the amortization term.
Underwriting
The process of evaluating a loan application to determine
the risk involved for the lender. Underwriting involves an
analysis of the borrower's creditworthiness and the quality
of the property itself.
VA
Mortgage
A mortgage that is guaranteed by the Department of Veterans
Affairs (VA). Also known as a government mortgage.
"Wrap
Around" Mortgage
A mortgage that includes the remaining balance on an existing
first mortgage plus an additional amount requested by the
mortgagor. Full payments on both mortgages are made to the
"Wrap Around" mortgagee, who then forwards the payments
on the first mortgage to the first mortgagee. These mortgages
may not be allowed by the first mortgage holder, and if discovered,
could be subject to a demand for full payment.
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