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Mortgage TerminologyA B C D E F G H I J K L M 7/23 and 5/25 Mortgages Mortgages with a one time rate adjustment after seven years
and five years respectively. 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. The right of the mortgagee (lender) to demand the immediate
repayment of the mortgage loan balance upon the default of the mortgagor
(borrower), or by using the right vested in the Due on Sale Clause. Adjustable Rate Mortgage (ARM) A mortgage in which the interest rate is adjusted
periodically based on a pre-selected index. Also sometimes
known as a renegotiable rate mortgage, variable rate mortgage or Canadian
rollover mortgage. Adjusted Basis The cost of a property plus the
value of any capital expenditures for improvements to the property minus any
depreciation taken. Adjustment Date The date that the interest rate
changes on an adjustable rate mortgage (ARM). 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. Adjustment Period The period elapsing between adjustment dates for an
adjustable rate mortgage (ARM). Affordability Analysis An analysis of a buyer’s ability to
afford the purchase of a home. Reviews income, liabilities, and available funds, and
considers the type of mortgage you plan to use, the area where you want to
purchase a home, and the closing costs that are likely. Amortization Loan payment divided into equal periodic payments calculated
to pay off the debt at the end of a fixed period, including accrued interest on
the outstanding balance. Amortization Term The length of time required to amortize the mortgage loan
expressed as a number of months. For example, 360 months is the amortization
term for a 30-year fixed rate mortgage. Annual Percentage Rate (APR) The measurement of the full cost of a loan including
interest and loan fees expressed as a yearly percentage rate. Because all
lenders apply the same rules in calculating the annual percentage rate, it
provides consumers with a good basis for comparing the cost of different loans. Appraisal An estimate of the value of property made by a qualified
professional called an "appraiser.” Appraised Value An opinion of a property's fair
market value, based on an appraiser's knowledge, experience, and analysis of
the property. Assessment A local tax levied against a property for a specific
purpose, such as a sewer or street lights. Assignment The transfer of a mortgage from one
person to another. Assumability An assumable mortgage can be transferred from the seller to
the new buyer. Generally requires a credit review of the new borrower and
lenders may charge a fee for the assumption. If a mortgage contains a due on
sale clause, it may not be assumed by a new buyer. 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 cost and new, probably higher, market
rate interest charges will apply. Assumption Fee The fee paid to a lender (usually by the purchaser of real
property) when an assumption takes place. Balloon Mortgage A loan which is amortized for a
longer period than the term of the loan. Usually this refers to a thirty year amortization
and a five or seven year term. At the end of the term of the loan, the
remaining outstanding principal on the loan is due. This final payment is known
as a balloon payment. Balloon Payment The final lump sum paid at the maturity date of a balloon
mortgage. Biweekly Payment Mortgage A plan to reduce the debt every two
weeks (instead of the standard monthly payment schedule). The 26 (or possibly 27) biweekly
payments are each equal to one half of the monthly payment required if the loan
were a standard 30-year fixed rate mortgage. The result for the borrower is a
substantial savings in interest. Blanket Mortgage A mortgage covering at least two
pieces of real estate as security for the same mortgage. Borrower (Mortgagor) One who applies for and receives a loan in the form of a
mortgage with the intention of repaying the loan in full. Bridge Loan A second trust that is collateralized by the borrower's
present home allowing the proceeds to be used to close on a new house before
the present home is sold. Also known as "swing
loan." 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. Buy Down When the lender and/or the home
builder subsidized 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. The amount of cash derived over a certain period of time
from an income producing property. The cash flow should be large enough to pay
the expenses of the income producing property (mortgage payment, maintenance,
utilities, etc...). Caps (interest) Consumer safeguards which limit the
amount of change to the interest rate for an adjustable rate mortgage. Caps (payment) Consumer safeguards which limit the
amount of change to the monthly payments for an adjustable rate mortgage. Certificate of Eligibility The document given to qualified veterans which entitles them
to VA guaranteed loans for homes, business and mobile homes. Certificates of
eligibility may be obtained by sending form DADA (Separation Paper) to the
local VA office with VA form 1880 (Request for Certificate of Eligibility). Certificate of Reasonable Value (CRV) An appraisal issued by the Veterans Administration showing
the property's current market value. Certificate of Veteran Status The document given to veterans or
reservists who have served 90 days of continuous active duty (including
training time).
It may be obtained by sending DD 214 to the local VA office with form 26-8261a
(Request for Certificate of Veteran Status). This document enables veterans to
obtain lower down payments on certain FHA insured loans. Change Frequency The frequency (in months) of payment and/or interest rate
changes in an adjustable rate mortgage (ARM). 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 cost of closing usually are about 3 percent to 6 percent of
the mortgage amount. Closing Costs Expenses over and above the price of
the property that are incurred by buyers and sellers when transferring
ownership of a property. Closing costs normally include an origination fee, property taxes,
charges for title insurance and escrow costs, appraisal fees, etc. Closing
costs will vary according to the area country and the lenders used. COFI An adjustable-rate mortgage with a rate that adjusts based
on a cost-of-funds index, often the 11th District Cost of Funds. Construction Loan A short term interim loan to pay for
the construction of buildings or homes. These are usually designed to provide periodic
disbursements to the builder as he or she progresses. Consumer Reporting Agency (or Bureau) An organization that handles the
preparation of reports used by lenders to determine a potential borrower's
credit history.
The agency gets data for these reports from a credit repository and other
sources. Contract A contract between purchaser and a seller of real estate to
convey title after certain conditions have been met. It is a form of
installment sale. Conventional Loan A mortgage not insured by FHA or guaranteed by VA. Conversion Clause A provision in an ARM allowing the
loan to be converted to a fixed-rate at some point during the term. Usually conversion is allowed at
the end of the first adjustment period. The conversion feature may cost extra. Credit Report A report documenting the credit history and current status
of a borrower's credit standing. Credit Risk Score A credit risk score is a statistical summary of the
information contained in a consumer's credit report. The most well known type
of credit risk score is the Fair Isaac or FICO score. This form of credit
scoring is a mathematical summary calculation that assigns numerical values to
various pieces of information in the credit report. The overall credit risk
score is highly relative in the credit underwriting process for a mortgage
loan. 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 gross monthly income. See housing expenses-to-income ratio. 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 When a mortgage is written with a monthly payment that is
less than required to satisfy the note rate, the unpaid interest is deferred by
adding it to the loan balance. 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 Point See point Down Payment Money paid to make up the difference between the purchase
price and the mortgage amount. 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. Money given by a buyer to a seller
as part of the purchase price to bind a transaction or assure payment. Entitlement The VA home loan benefit is called an entitlement (i.e.
entitlement for a VA guaranteed home loan). This is also known as eligibility. Equal Credit 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. The
value an owner has in real estate over and above the obligation against the
property. Escrow An account held by the lender into which the home buyer pays
money for tax or insurance payments. Also earnest deposits held pending loan
closing. Escrow Disbursements The use of escrow funds to pay real estate taxes, hazard
insurance, mortgage insurance, and other property expenses as they become due. Escrow Payment The part of a mortgagor’s monthly payment that is held by
the servicer to pay for taxes, hazard insurance,
mortgage insurance, lease payments, and other items as they become due. 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 Bank Board (FHLBB) The former name for the regulatory and supervisory agency
for federally chartered savings institutions. The agency is now called the Office of
Thrift Supervision Federal Home Loan Mortgage Corporation(FHLMC) also called "Freddie
Mac" A government sponsored entity that purchases conventional
mortgage 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 know as "Fannie
Mae" A government sponsored entity that purchases and sells
conventional residential mortgages as well as those insured by FHA or
guaranteed by VA. 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 moderately priced homes almost anywhere in
the country. FHA Mortgage Insurance Requires a fee (up to 2.25 percent of the loan amount) paid
at closing to insure the loan with FHA. In addition, FHA mortgage insurance
requires an annual fee of up to 0.5 percent of the current loan amount, paid in
monthly installments. The lower the down payment, the more years the fee must
be paid. FHLMC The Federal Home Loan Mortgage Corporation provides a
secondary market for savings and loans by purchasing their conventional loans. Also known as "Freddie Mac." Firm Commitment A promise by FHA to insure a
mortgage loan for a specified property and borrower. A promise from a
lender to make a mortgage loan. First Mortgage The primary lien against a
property."> Fixed Installment The monthly payment due on a
mortgage loan including payment of both principal and interest. Fixed Rate Mortgage The mortgage interest rate will remain the same on these
mortgages throughout the term of the mortgage for the original borrower. Fully Amortized ARM An adjustable rate mortgage (ARM) with a monthly payment
that is sufficient to amortize the remaining balance, at the interest accrual
rate, over the amortization term. FNMA The Federal National Mortgage Association is a secondary
mortgage institution. FNMA buys VA, FHA, and conventional mortgages from
primary lenders. Also known as "Fannie Mae."
Foreclosure A legal process by which the lender
or the seller forces a sale of a mortgaged property because the borrower has
not met the terms of the mortgage. Also known as a repossession of property.
Freddie Mac See Federal Home Loan Mortgage Corporation 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. Growing Equity Mortgage (GEM) A fixed rate mortgage that provides scheduled payment
increases over an established period of time. The increased amount of the
monthly payment is applied directly toward reducing the remaining balance of
the mortgage. Guaranty 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. Guarantee Mortgage A mortgage that is guaranteed by a
third party. 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 gross monthly income. See debt-to-income
ratio. HUD-1 Statement A document that provides an itemized listing of the funds
that are payable at closing. Items that appear on the statement include real
estate commissions, loan fees, points and initial escrow amounts. Each item on
the statement is represented by a separate number within a standardized
numbering system. The totals at the bottom of the HUD-1 statement define the
seller's net proceeds and the buyer's net payment at closing. 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. 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. Indexed Rate The sum of the published index plus
the margin. For
example if the index is 4% and the margin is 2.75%, the indexed rate would be
6.75%. Often, lenders charge less than the indexed rate the first year of an
adjustable rate mortgage. Initial Interest Rate This refers to the original interest rate of the mortgage at
the time of closing. This rate changes for an adjustable rate mortgage (ARM).
It's also known as "start rate" or "teaser." Installment The regular periodic payment that a
borrower agrees to make to a lender. Insured Mortgage A mortgage that is protected by the
Federal Housing Administration (FHA) or by private mortgage insurance (MI). Interest The fee charged for borrowing money. Interest Accrual Rate The percentage rate at which
interest accrues on the mortgage. In most cases, it is also the rate used to calculate the
monthly payments. Interest Rate Buydown Plan An arrangement that allows the
property seller to deposit money to an account. That money is then released each
month to reduce the mortgagor's monthly payments during the early years of a
mortgage. Interest Rate Ceiling For an adjustable rate mortgage (ARM), the maximum interest
rate, as specified in the mortgage note. Interest Rate Floor For an adjustable rate mortgage (ARM), the minimum interest
rate, as specified in the mortgage note. Interim Financing A construction loan made during completion of a building or
a project. A permanent loan usually replaces this loan after completion. Investor A money source for a lender. 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. The penalty a borrower must pay when a payment is made a
stated number of days after the due date. Lease-Purchase Mortgage Loan An alternative financing option that
allows low and moderate income home buyers to lease a home with an option to
buy. Each
month's rent payment consists of principal, interest, taxes and insurance
(PITI) payments on the first mortgage plus an extra amount that accumulates in
a savings account for a down payment. Liabilities A person's financial obligations. Liabilities include long term and
short term debt. Lien A claim upon a piece of property for
the payment or satisfaction of a debt or obligation. Lifetime Payment Cap For an adjustable rate mortgage
(ARM), a limit on the amount that payments can increase or decrease over the
life of the mortgage. Lifetime Rate Cap For an adjustable rate mortgage
(ARM), a limit on the amount that the interest rate can increase or decrease
over the life of the loan. See cap. Loan A sum of borrowed money (principal)
that is generally repaid with interest. Loan to Value Ratio The relationship between the amount of the mortgage loan and
the appraised value of the property expressed as a percentage. Lock A lender's guarantee that the mortgage rate quoted will be
good for a specific number of days from the day of application. 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. Maturity The date on which the principal
balance of a loan becomes due and payable. MIP (Mortgage Insurance Premium) Insurance from FHA to the lender
against incurring a loss on account of the borrower's default. Monthly Fixed Installment The portion of the total monthly
payment that is applied toward principal and interest. When a mortgage negatively amortizes,
the monthly fixed installment does not include any amount for principal
reduction and doesn't cover all of the interest. The loan balance therefore
increases instead of decreasing. Mortgage A legal document that pledges a
property to the lender as security for payment of a debt. Mortgage Banker A company that originates mortgages
for resale in the secondary mortgage market. Mortgage Broker An individual or company that
charges a service fee to bring borrowers and lenders together for the purpose
of loan origination. Mortgagee The lender. Mortgage Insurance Money paid to insure the mortgage when the down payment is
less than 20 percent. See private mortgage insurance, FHA mortgage insurance. Mortgage Life Insurance A type of term life insurance. In the event that the borrower dies
while the policy is in force, the mortgage debt is automatically paid by
insurance proceeds. Mortgagor The borrower or homeowner. 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 home buyer 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. Note A legal document that obligates a borrower
to repay a mortgage loan at a stated interest rate during a specified period of
time. Office of Thrift Supervision (OTS) The regulatory and supervisory
agency for federally chartered savings institutions. Formally known as Federal
Home Loan Bank Board One Year Adjustable Rate Mortgage Mortgage where the annual rate
changes yearly.
The rate is usually based on movements of a published index plus a specified
margin, chosen by 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 the face value of the loan. Owner Financing A property purchase transaction in which the party selling
the property provides all or part of the financing. The date when a new monthly payment
amount takes effect on an adjustable rate mortgage (ARM) or a graduated-payment
mortgage (GPM).
Generally, the payment change date occurs in the month immediately after the
adjustment date. Periodic Payment Cap A limit on the amount that payments
can increase or decrease during any one adjustment period. Periodic Rate Cap A limit on the amount that the interest rate can increase or
decrease during any one adjustment period, regardless of how high or low the
index might be. Permanent Loan A long term mortgage, usually ten
years or more. Also called an "end loan." PITI Principal, interest, taxes and
insurance. Also called monthly housing expense. Pledged Account Mortgage (PAM): Money is placed in a pledged savings account and this fund
plus earned interest is gradually used to reduce mortgage payments. Points (Loan 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). Power of Attorney A legal document authorizing one
person to act on behalf of another. Preapproval The process of determining how much money you will be
eligible to borrow before you apply for a loan. Prepaid 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 many
states. Primary Mortgage Market Lenders, such as savings and loan associations, commercial
banks, and mortgage companies, who make mortgage loans directly to borrowers.
These lenders sometimes sell their mortgages to the secondary mortgage markets
such as FNMA or GNMA, etc… Principal The amount borrowed or remaining unpaid. The
part of the monthly payment that reduces the remaining balance of a mortgage. Principal Balance The outstanding balance of principal
on a mortgage not including interest or any other charges. Principal, Interest, Taxes, and Insurance (PITI) The four components of a monthly
mortgage payment.
Principal refers to the part of the monthly payment that reduces the remaining
balance of the mortgage. Interest is the fee charged for borrowing money. Taxes
and insurance refer to the monthly cost of property taxes and homeowners
insurance, whether these amounts are paid into an escrow account each month or
not. 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 3 percent in some cases.
With the smaller down payment loans, however, borrowers are usually required to
carry private mortgage insurance. Private mortgage insurance will usually require
an initial premium payment and may require an additional monthly fee depending
on your loan's structure. 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. A commitment issued by a lender to a borrower or another
mortgage originator guaranteeing a specified interest rate and lender costs for
a specified period of time. Realtor® A real estate broker or an associate holding active
membership in a local real estate board affiliated with the National
Association of Realtors. Real Estate Agent A person licensed to negotiate and transact the sale of real
estate on behalf of the property owner. Real Estate Settlement Procedures Act (RESPA) A consumer protection law that
requires lenders to give borrowers advance notice of closing costs. 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. Recording Fees Money paid to the lender for recording a home sale with the
local authorities, thereby making it part of the public records. Refinance Obtaining a new mortgage loan on a property already owned
often to replace existing loans on the property. Renegotiable Rate Mortgage A loan in which the interest rate is
adjusted periodically. See adjustable rate mortgage. RESPA Short for the Real Estate Settlement Procedures Act. 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 the 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 collateral for and repayment of the loan. Revolving Liability A credit arrangement, such as a credit card, that allows a
customer to borrow against a pre-approved line of credit when purchasing goods
and services. The document issued by the mortgagee when the mortgage loan
is paid in full. Also called a "release of
mortgage." Second Mortgage A mortgage made subsequent to another mortgage and
subordinate to the first one. |