Glossary of Mortgage Terms
3/1, 5/1, 7/1 and 10/1 ARMs –
Adjustable rate mortgages in which rate is fixed for three year, five year, seven
year and 10-year periods, respectively, but may adjust annually after that.
Adjustable Rate Mortgage (ARM) -
A mortgage in which the interest rate is adjusted periodically based on an index.
Also called a variable rate mortgage.
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) -
A figure that states the total yearly cost of a mortgage as expressed by the actual
rate of interest paid. The APR includes the base interest rate, points, and any
other add-on loan fees and costs. As a result the APR is invariably higher for the
rate of interest that the lender quotes for the mortgage but gives a more accurate
picture of the likely cost of the loan. Keep in mind, however, that most mortgages
are not held for their full 15 or 30 year terms, so the effective annual percentage
rate is higher than the quoted APR because the points and loan fees are spread out
over fewer years.
Appraisal -
The determination of property value based on recent sales information of similar
properties.
Balloon Payment -
The final lump sum that is paid at the end of the balloon mortgage.
Borrower –
One who applies for and receives a loan in the form of a mortgage with the intention
of repaying the loan in full.
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.
Closing -
Final arrangements to transfer title of property as well as allocate charges and
credits.
Closing Costs -
Closing costs are fees paid by the borrower when a property is purchased or refinanced.
Costs incurred include a loan origination fee, discount points, appraisal fee, title
search, title insurance, survey, taxes, deed recording fee, and credit report charges.
All closing costs are separated into "non-recurring," and "pre-paid."
Non-recurring charges are any items that are paid only once because a loan was obtained
or a property bought, such as a loan origination fee. Pre-paid charges are those
that recur over time, like insurance and property taxes. These are summarized in
the Good Faith Estimate.
Conventional Mortgage -
A mortgage loan that is obtained without any additional guarantees for repayment,
such as FHA insurance, VA guarantees, or private insurance. This is usually given
at an 80% loan-to-value ratio.
Construction Loan -
A short term loan for funding the cost of construction. The lender advances funds
to the builder as the work progresses.
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.
Debt-to-Income Ratio (DTI) -
The ratio of aggregate monthly debt to aggregate monthly income.
Deed of Trust -
Synonymous to a mortgage. A deed of trust or mortgage is obtained, depending on
the state in which the borrower will reside.
Delinquency - Late- or non-payments of principal, interest, taxes,
or insurance.
Down Payment -
Money paid by a buyer from his own funds, as opposed to that portion of the purchase
price which is financed.
Earnest Money Deposit -
A deposit made by a potential home buyer to show that they are serious about purchasing
the property.
Equal Credit Opportunity Act (ECOA) -
The act declaring the elimination of discrimination on the basis of age, sex, and
race in finance.
Equity -
The difference between the current market value of a property and the principal
balance of all outstanding loans.
Escrow Account (impound account) -
An account that a borrower can hold with a lender once a purchase transaction is
closed. This requires borrowers to pay more than the principal and interest each
month. The overage is put into escrow, which the lender uses to pay items like property
taxes and homeowner's insurance when they are due. This eliminates the actual number
of payments that a homeowner has to worry about, but not the amount that has to
actually be paid.
Fannie Mae (FNMA) -
The Federal National Mortgage Association is a congressionally chartered, shareholder-owned
company. This organization is the nation's largest supplier of home mortgage funds.
Federal Housing Administration (FHA) -
Established in 1934 to advance homeownership opportunities for all Americans, the Federal Housing Administration assists homebuyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults. This encourages lenders to make loans to borrowers who might not qualify for conventional mortgages.
First Mortgage - A mortgage that has priority over other mortgages.
Fixed-Rate Mortgage - A mortgage where the interest rate does not
change for the life of the loan.
Foreclosure -
A legal procedure in which real estate is sold by the lender to pay a defaulting
borrower's debt .
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.
HUD1 Statement: also known as the "settlement sheet,"
it itemizes all closing costs; must be given to the borrower at or before closing.
Impound –
The 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
Jumbo Loan -
A loan for $417,001 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.
Late Charge –
The penalty a borrower must pay when a payment is made a stated number of days after
the due date.
Liabilities –
A person's financial obligations. Liabilities include long term and short term debt.
Lien -
A legal claim by one party against the property of another as security for a debt.
Must be paid off when property is sold. A mortgage or a first trust deed is a lien.
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-in –
The act of committing to a mortgage rate. This action, taken by a borrower some
time between the application and the closing dates.
Market Value –
The highest price that 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 -
A legal document that pledges property to a creditor for the repayment of the loan,
and is the term used to describe the loan itself. Some states use the term First
Trust Deeds to refer to mortgage loans.
Mortgage Insurance -
Insurance that covers the lender against losses incurred as a result of a default
on a home loan. This is usually required on all loans that have a loan-to-value
higher than eighty percent. Mortgages that have an 80% LTV that do not require mortgage
insurance have higher interest rates. The lenders then pay the mortgage insurance
themselves. In addition, FHA loans and some first-time homebuyer programs require
mortgage insurance regardless of the loan-to-value.
Mortgagor -
The borrower in a mortgage agreement.
Negative Amortization -
Essentially occurs when a borrower makes a minimum payment that may not cover the
interest that is due. Loan balance then increases as a result.
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 -
The fee imposed by a lender to cover certain processing expenses in connection with
making a loan. Usually a percentage of the amount loaned.
PITI -
This is an acronym for payments to lender that cover principal, interest, taxes and insurance on a property.
PMI (Private Mortgage Insurance) -
Private Mortgage Insurance is insurance written by a private mortgage insurance company to protect the lender against losses caused by mortgage default. This is commonly required on loan transactions involving less than a 20% down payment or equity position.
Points –
Interest Charges paid up-front when a borrower closes a loan. 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.
Power of Attorney –
A legal document authorizing one person to act on behalf of another.
Pre-Approval -
A term used to mean that a borrower has completed a loan application and provided
debt, income, and savings information that has been reviewed and pre-approved by
an underwriter.
Pre-Payment -
Any amount paid so as to reduce the principal before the due date.
Pre-Qualification -
After a loan officer has made inquiries about a borrower's debt, income, and savings,
he or she can write a written statement (pre-qualification) about the borrower's
chances for qualifying for a home 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%.
Principal -
The amount of debt, not counting interest, left on a loan.
Qualifying Ratio -
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.
Real Estate Settlement Procedures Act (RESPA) -
An act requiring the revelation of all costs involved in a real estate closing to
all participants.
Recission –
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.
Refinancing -
The process of paying off one loan with the proceeds from a new loan, using the
same property as security.
Second Mortgage -
A mortgage that has a lien position subordinate to the first mortgage.
Title Insurance -
Title Insurance policies typically insure a homebuyer against any title-search errors
or mistakes, and against loss due to disputes over property ownership. Title Insurance
can additionally offer protection to the lender under similar circumstances. The
cost of title insurance is usually a set value per thousand of dollars of the total
loan amount.
Truth-in-Lending Law -
Provision that requires lenders to reveal the actual costs of borrowing.
VA (Department of Veterans Affairs -
A federal agency which guarantees loans made to veterans. Similar to mortgage insurance, a loan guarantee protects lenders against loss that may result from a borrower default.
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.