A Consumer's
Glossary of Mortgage Terms
Shopping for a mortgage? If you are one of
the tens of thousands of today's home shoppers, you probably have discovered that mortgage
lending has a language all its own. For example, you've probably heard about
"points", "margins", and "repayment penalties." Should you
look for an "assumption?" What are "acceleration clauses?" For the
unprepared, this new terminology can be quite confusing. As with any contract, before you
sign your mortgage, you should know what you are signing.
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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 your default on you loan.
- Adjustable Rate Mortgage
(ARM)
- Is a mortgage in which the interest rate is
adjusted periodically based on a preselected 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.
- 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.
- 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 usually
are 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 guarantee 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).
- 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.
- 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)
- Is 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 homebuyer pays money for tax or insurance payments.
- 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 standard 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 t o 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.
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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 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.
- 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).
- 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.
- Jumbo Loan
- A loan which is larger (more than $203,150)
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.
- 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.
- 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 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 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.
- 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 homebuyer 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.
- 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.
- 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,
left on a loan.
- Private Mortgage Insurance
(PMI)
- In the event that you do not have a 20 percent
down payments, 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.
- 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.
- 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.
- 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 function 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.
- Underwriting
- The decision whether to make a loan to a
potential homebuyer based on credit, employment, assets, and other factors and the
matching of this risk to an appropriate rate and term or loan amount.
- 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
- A document signed by the borrower's employer
verifying his/her position and salary.
- 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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