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- 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.
(Return to the top of
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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.
(Return to the top of
the page.)
- 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.
(Return to the top of
the page.)
- 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 to the top of
the page.)
- 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).
(Return to the top of
the page.)
- 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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the page.)
- 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.
(Return to the top of
the page.)
- 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.
(Return to the top of
the page.)
- 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.
(Return to the top of
the page.)
- 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.
(Return to the top of
the page.)
- 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.
(Return to the top of
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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.
(Return to the top of
the page.)
- 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.
(Return to the top of
the page.)
- 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.
(Return to the top of
the page.)
- 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.
(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.
- 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.
(Return to the top of
the page.)
- 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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