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 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.
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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.
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- 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.
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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)
- 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.
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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 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).
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- 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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- Jumbo Loan
- A loan which is larger (more than $240,000)
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.
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- 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.
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- 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.
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- 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.
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- 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.
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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.
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- 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.
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- 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.
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- 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.
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- 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.
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- 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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