Mortgage Glossary
Adjustable Rate
Mortgage (ARM) -
A mortgage in which the interest rate is adjusted periodically
based on an index. Also called a variable rate mortgage.
Adjustment Interval
-
For an adjustable rate mortgage, the time between changes
in the interest rate charged. The most common adjustment
intervals are one, three or five years.
Amortization -
Literally to "kill off" (root: mort) the outstanding
balance of a loan by making equal payments on a regular
schedule (usually monthly). The payments are structured
so that the borrower pays both interest and principal
with each equal payment.
Annual Percentage
Rate (APR) -
The interest rate which reflects the cost of a mortgage
as a yearly rate. This rate is usually higher than the
stated loan rate for the mortgage, because it takes
into account points and other charges.
Application Fee
-
The fee charged by the lender to the borrower for applying
for a loan. Payment of this fee does not guarantee that
a loan will be approved. Some lenders may apply the
cost of the application fee to certain closing costs.
Appraisal -
The determination of property value based on recent
sales information of similar properties.
Assumable Loan -
These loans may be passed on from a seller of a
home to the buyer. The buyer "assumes" all outstanding
payments.
Balloon Mortgage
-
Behaves like a fixed-rate mortgage for a set number
of years (usually five or seven) and then must be paid
off in full in a single "balloon" payment. Balloon loans
are popular with those expecting to sell or refinance
their property within a definite period of time.
Banker -
An individual in the business of assisting in arranging
funding or negotiating contracts for a client but who
does loan the money himself. Bankers usually
charge a fee or receive a commission for their services.
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.
Caps -
A set percentage amount by which an adjustable rate
mortgage may adjust each adjustment period. For adjustable
loans, caps are usually quoted as two numbers as in
2/6. The first number indicates how much a loan may
adjust at each adjustment period while the second number
indicates how much a loan may adjust over its lifetime.
Loans like the 3/1 and 5/1 adjustable
which have an initial fixed period are quoted with 3
numbers as in 3/2/6 which would mean that the first
adjustment may be as much as 3%, subsequent adjustments
are capped at 2% each, and the lifetime cap is 6%.
Two-Step loans are quoted with a single
cap, which is the amount by which the loan may adjust
at its single adjustment date.
Closing Costs -
Fees paid by the borrower when property is purchased
or refinanced. These typically include a loan origination
fee, discount points, appraisal fee, title search, title
insurance, survey, taxes, deed recording fee, and credit
report charges.
Commitment -
A written letter of agreement detailing the terms and
conditions by which the lender will lend and the borrower
will borrow funds to finance a home.
Conforming Loan
-
A mortgage loan for 417,000 in the continental
United States (Alaska and Hawaii limits are higher).
Construction Loan
-
A short term loan for funding the cost of construction.
The lender advances funds to the builder as the work
progresses.
Conventional Loan
-
A mortgage neither insured by the FHA nor guaranteed
by the VA.
Conversion -
The right of a borrower to convert an adjustable or
balloon loan into a fixed loan.
Credit Rating -
Borrowers are rated by lenders according to the borrower's
credit-worthiness or risk profile. Credit ratings are
expressed as letter grades such as A-, B, or C+. These
ratings are based on various factors such as a borrower's
payment history, foreclosures, bankruptcies and charge-offs.
There is no exact science to rating a borrower's credit,
and different lenders may assign different grades to
the same borrower.
Credit Report -
A report to a prospective lender on the credit standing
of a prospective borrower. Used to help determine creditworthiness.
Information regarding late payments, defaults, or bankruptcies
will appear here.
Deed -
A legal document which affects the transfer of ownership
of real estate from the seller to the buyer.
Default -
The failure to make payments on a loan.
Down Payment -
Money paid by a buyer from his own funds, as opposed
to that portion of the purchase price which is financed.
Equity -
The difference between the current market value of a
property and the principal balance of all outstanding
loans.
FHA Loan -
A government-backed mortgage loan supported by the US
FHA and the Department of Housing and Urban Development
(HUD).
Finance Charge -
The total dollar amount your loan will cost you. It
includes all interest payments for the life of the loan,
any interest paid at closing, your origination fee and
any other charges paid to the lender and/or broker.
Appraisal, credit report and title search fees are not
included in the finance charge calculation.
Fixed-Rate Mortgage
-
A mortgage where the interest rate does not change for
the life of the loan.
Float -
Between the time of application and closing, a borrower
may choose to bet on interest rates decreasing by electing
to float. Floating is essentially choosing not to lock
the interest rate. Since it is the borrower's responsibility
to lock his or her rate before (or at) closing, choosing
to float is considered risky and may result in a higher
interest rate. Request information from your lender
regarding lock procedures.
Foreclosure -
A legal procedure in which real estate is sold
by the lender to pay a defaulting borrower's debt .
Good Faith Estimate
-
An estimate of charges which a borrower is likely
to incur in connection with a loan closing.
Gross Monthly Income
-
The total amount the borrower earns per month, not counting
any taxes or expenses. Often used in calculations to
determine whether a borrower qualifies for a particular
loan.
Hazard Insurance
-
A form of insurance in which the insurance company protects
the insured from certain losses, such as fire, vandalism,
storms and certain other natural causes.
Housing Ratio -
The ratio of the monthly housing payment to total gross
monthly income. Also called Payment-to-Income Ratio
or Front-End Ratio.
Index -
A published interest rate not controlled by the lender
to which the interest rate on an Adjustable Rate Mortgage
(ARM) is tied. The index and the interest rate linked
to it may increase or decrease.
Interest Rate -
The percentage of an amount of money which is paid for
its use for a specified time.
Jumbo Loan -
A loan for $417,000 or more in the continental United
States (Alaska and Hawaii limits are higher). These
limits are 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.
Lender -
The bank, mortgage company, or mortgage broker offering
the loan. Many institutions only "originate" loans and
then resell the obligation to third parties.
Life of Loan Cap
-
The maximum interest rate that can be charged during
the life of the loan. Also called Lifetime Cap. This
value is often expressed as an increment above the initial
loan rate. For example, an adjustable rate loan with
an initial rate of 7.25% and a 6% lifetime cap will
never adjust above a rate of 13.25% (7.25+6.0).
Loan-To-Value Ratio
-
The relationship between the amount of the mortgage
loan and the appraised value of the property expressed
as a percentage. A LTV ratio of 90 means that a borrower
is borrowing 90% of the value of the property and paying
10% as a down payment. For purchases, the value of the
property is assumed to be the purchase price, for refinances
the value is determined by an appraisal.
Lock noun -
The period, expressed in days, during which a lender
will guarantee a rate. Some lenders will lock rates
at the time of application while others will allow the
borrower to lock the rate after the application is taken.
Request information from your lender regarding lock
procedures.
Lock verb -
The act of committing to a mortgage rate. This action,
taken by a borrower some time between the application
and the closing dates, is sometimes accompanied by a
payment by the borrower to the lender. Opposite of float
Margin -
The amount a lender adds to the quoted index rate
for an adjustable rate loan to determine the new interest
rate.
Minimum Credit -
Refers to the minimum Credit Rating a borrower must
have in order to qualify for the listed loan.
Monthly Housing
Expense -
Total principal, interest, taxes, and insurance paid
by the borrower on a monthly basis. Used with gross
income to determine affordability.
Mortgagee -
The lender.
Mortgagor -
The borrower.
Net Effective Income
-
Gross income less federal income tax.
Origination Fee
-
The fee imposed by a lender to cover certain processing
expenses in connection with making a loan. Usually a
percentage of the amount loaned.
Points -
Prepaid interest paid by the borrower to the lender
at closing. A point is equal to 1 percent of the loan
amount (e.g. 1.5 points on a $100,000 mortgage would
cost the borrower $1,500). Generally, by paying more
points at closing, the borrower reduces the interest
rate of his loan and thus future monthly payments.
Prepaids -
Expenses such as taxes, insurance and assessments which
are paid in advance of their due date and which must
be paid by the buyer on a prorated basis at closing.
Prepayment -
The ability to pay off the remaining balance of a loan.
Prepayment Penalty
-
Lenders who impose prepayment penalties will charge
borrowers a fee if they wish to repay part or all of
their loan in advance of the regular schedule.
Principal -
The amount of debt, not counting interest, left on a
loan.
Private Mortgage
Insurance (PMI) -
Paid by a borrower to protect the lender in case of
default. PMI is typically charged to the borrower when
the Loan-to-Value Ratio is greater than 80%.
Qualifying Ratio
-
The ratio of the borrower's fixed monthly expenses to
his gross monthly income.
The Front-End Ratio is the percentage
of a borrower's gross monthly income (before income
taxes) that would cover the cost of PITI (Mortgage Principal
Payment + Mortgage Interest Payment
+ Property Taxes + Homeowners I
nsurance). In the case of a 28% Front-End Ratio a borrower
could qualify if the proposed monthly PITI payments
were 28% or less than the borrower's gross monthly income.
The Back-End Ratio is the percentage
of a borrower's gross monthly income that would cover
the cost of PITI plus any other monthly debt payments
like car or personal loans and credit card debt.
Please note that qualifying ratios are
only a rough guideline in determining a potential borrower's
credit-worthiness. Many factors such as excellent or
poor credit history, amount of down payment, and size
of loan will influence the decision to approve or disapprove
a particular loan. We urge all borrowers to discuss
their particular situation with a qualified lender regardless
of the outcome of any self-qualification exercise
Settlement Costs
-
See Closing Costs.
Tax Lien -
A claim against real estate for the amount of its unpaid
taxes.
Title -
A document that gives evidence of an individual's ownership
of property.
Title Insurance
-
Insurance against loss resulting from defects of title
to a specifically described parcel of real estate.
Title Search -
An examination of city, town, or county records to determine
the legal ownership of real estate.
Total Debt Ratio
-
Monthly debt and housing payments divided by gross monthly
income. Also known as Back-End Ratio.
VA Loan -
A government-backed mortgage loan supported by the US
Veterans Administration.
Variable Rate Mortgage
-
See Adjustable Rate Mortgage.
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