- Adjustable-Rate Mortgage (ARM)
- A loan on which the monthly payments will increase or decrease over time, based on changes in the ARM’s interest rate index. ARM payments typically are adjusted every six months or once a year. Common indices to which ARMs are tied include the 11th District Cost of Funds, one-year T-note and six-month T-bill.
- Adjusted Basis
- The cost of a property plus the value of any capital expenditure for improvements to the property minus any depreciation taken.
- Affordability Analysis
- An analysis of a buyer’s ability to afford the purchase of a home. Reviews income, liabilities and available funds. Considers the type of mortgage you plan to use, the area where you want to purchase a home and the probable closing costs.
- The gradual repayment of a mortgage through monthly (e.g. installment) payments. In the early years of a mortgage, most of the monthly payment goes toward interest. Later in the mortgage, more of the payment goes toward reducing the loan’s principal balance.
- Annual Percentage Rate (APR)
- The annual cost of a mortgage, including interest, loan fees and other costs, stated as a percentage of the loan amount.
- Appraisal/Appraised Value
- An opinion of the market value of a home expressed by a real estate appraiser.
- The term used to describe a form of dispute resolution that occurs outside of the court system, usually by private agreement between parties. Basically, arbitration is a dispute resolution system where the parties submit arguments and evidence to a neutral person, known as the arbitrator, who then renders a decision, called an award, based upon the evidence and arguments presented.
- Balloon Mortgage
- A loan that is amortized for a longer period than the term of the loan. Usually this refers to a 30-year amortization and a five-year term. At the end of the term of the loan, the remaining outstanding principal on the loan is due.
- Bridge Loan
- A second trust for which the borrower’s present home is collateral, allowing the proceeds to be used to close on a new house before the present home is sold. Also known as a “swing loan.”
- When the lender and/or the homebuilder subsidize a 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.
- Provisions of an adjustable-rate mortgage limiting how much the interest rate can change at each adjustment period (e.g., every six months, once a year) or over the life of the loan (rate cap). A payment cap limits how much the payment due on the loan can increase or decrease.
- Change Frequency
- The frequency (in months) of payment and/or interest rate changes on an adjustable-rate mortgage.
- The meeting at which a home sale is finalized. The buyer signs the mortgage, pays closing costs and receives title to the home. The seller pays closing costs and receives the net proceeds from the home sale.
- Closing Costs
- Expenses in addition to the price of the home incurred by buyers and sellers when a home is sold. Common closing costs include escrow fees, title insurance fees, document recording fees and real estate commissions.
- A condition that must be fulfilled before a contract is binding.
- Contract Sale or Deed
- A contract between purchaser and seller of real estate to convey title after certain conditions have been met. It is a form of installment sale.
- Conventional Mortgage
- A loan not guaranteed, insured or made by the federal or state government.
- 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.
- 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.
- Debt-To-Income (DTI) Ratio
- The ratio of monthly debt payments to monthly gross income. Lenders use a housing DTI ratio (house payment divided by monthly income) and a total DTI ratio (total debt payments including the house payment divided by monthly income) to determine whether a borrower’s income qualifies him or her for a mortgage.
- 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.
- Earnest Money
- The deposit given by a buyer to a seller to show that the buyer is serious about purchasing the home. Earnest money usually is refundable to homebuyers in the event a contingency of the sales contract cannot be met.
- The Veterans Affairs home loan benefit (i.e., entitlement for a VA-guaranteed home loan). This is also known as eligibility.
- The holding of documents and money by a neutral third party prior to 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 mortgager’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.
- Farmers Home Administration (FmHA)
- Provides financing to farmers and other qualified borrowers who are unable to obtain loans elsewhere.
- Federal Housing Administration (FHA)
- A division of the Department of Housing and Urban Development whose main activity is insuring residential mortgage loans made by private lenders. FHA also sets standards for underwriting mortgages.
- Federal National Mortgage Association (Fannie Mae)
- A privately owned corporation created by Congress that purchases and sells conventional residential mortgages as well as those insured by Federal Housing Administration or guaranteed by Veterans Affairs. This institution, which provides funds for one in seven mortgages, makes mortgage money more available and more affordable. Fannie Mae and Freddie Mac are the key secondary mortgage-market agencies.
- 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 downpayment, the more years the fee must be paid.
- Firm Commitment
- A promise by Federal Housing Administration to insure a mortgage loan for a specified property and borrower. A promise from a lender to make a mortgage loan.
- Federal Home Loan Mortgage Corporation (Freddie Mac)
- A quasi-governmental, privately owned agency that purchases conventional mortgage from insured depository institutions and HUD-approved mortgage bankers. Fannie Mae and Freddie Mac are the key secondary mortgage-market agencies
- 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.
- 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.
- Hazard Insurance
- A form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm and the like.
- Homeowner’s Warranty
- A policy that covers certain repairs (e.g. plumbing or heating) of a newly purchased home for a certain period of time.
- Housing Expenses-to-Income Ratio
- The ratio, expressed as a percentage, which results when a borrower’s housing expenses are divided by his or her gross monthly income.
- 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. A separate number within a standardized numbering system represents each item on the statement. The totals at the bottom of the HUD-1 statement define the seller’s net proceeds and the buyer’s net payment at closing.
- 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 were 9 percent and the margin 2.75 percent, the indexed rate would be 11.75 percent. Often, lenders charge less than the indexed rate the first year of an adjustable-rate mortgage.
- Interest Rate Ceiling
- For an adjustable-rate mortgage, the maximum interest rate as specified in the mortgage note.
- Interest Rate Floor
- For an adjustable-rate mortgage, 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.
- Lease-Purchase Mortgage Loan
- An alternative financing option that allows low- and moderate-income homebuyers 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 downpayment.
- Lifetime Payment Cap
- For an adjustable-rate mortgage, 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, a limit on the amount that the interest rate can increase or decrease over the life of the loan.
- Loan-to-Value (LTV) Ratio
- The ratio of the amount of money owed on a home to the home’s value. The LTV ratio for a $100,000 home financed with a $90,000 mortgage would be 90 percent, for example.
- 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.
- A process used to resolve disputes. In mediation, the parties to the dispute are assisted by a neutral third person called a mediator. The mediator is not empowered to impose a settlement or decision on the parties; rather, the mediator facilitates discussions and negotiation between the parties with the goal of assisting the parties in reaching a mutually acceptable settlement of their dispute.
- Mortgage Broker
- An individual who assists with arranging funding or negotiating contracts for a client but who does not loan the money himself or herself. Brokers usually charge a fee or receive a commission for their services.
- Mortgage Insurance
- Money paid to insure the mortgage when the down payment is less than 20 percent.
- Mortgage Life Insurance
- A type of term life insurance specifying that in the event that the borrower dies while the policy is in force, the debt is automatically paid by insurance proceeds.
- Mortgage Interest Deduction
- The ability of mortgage borrowers to deduct the interest paid on a home loan for purposes of federal and state income taxes.
- Negative Amortization
- Occurs when 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.
- One-year Adjustable
- Mortgage whose 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
- A fee charged by a lender for making a mortgage.
- Principal, interest, taxes and insurance – the primary components of a monthly mortgage payment.
- 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.
- One point equals 1 percent of the mortgage amount. Points are charged by lenders to increase the lender’s return on the mortgage. Typically, lenders may charge anywhere from zero to two points. Loan points are tax-deductible.
- 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.
- Private Mortgage Insurance (PMI)
- Insurance issued by private insurers that protects lenders against a loss if a borrower defaults on a mortgage with a low downpayment (e.g., less than 20 percent).
- Qualifying Ratios
- 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.
- Rate Lock
- A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate and lender costs for a specified period of time.
- Real Estate Settlement Procedures Act (RESPA)
- A consumer protection law that requires lenders to give borrowers advance notice of closing costs. RESPA is a federal law that, among other things, allows consumers to review information on known or estimated settlement cost after application and prior to or at settlement. The law requires lenders to furnish the information after application only.
- The cancellation of a contract by putting all parties back to the position before they entered the contract. In some mortgage financing situations involving equity in the home as security, the law gives the homeowner three days to cancel a contract.
- Recording Fees
- Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records.
- 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.
- 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.
- Second Mortgage
- A mortgage made subsequent to another mortgage and subordinate to the first one.
- Secondary Mortgage Market
- The place where primary mortgage lenders sell the mortgages they make to obtain more funds to originate more new loans. It provides liquidity for the lenders.
- An organization that collects principal and interest payments from borrowers and manages borrowers’ escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.
- Standard Payment Calculation
- The method used to determine the monthly payment required to repay the remaining balance of a mortgage in substantially equal installments over the remaining term of the mortgage at the current interest rate.
- Step-Rate Mortgage
- A mortgage that allows for the interest rate to increase according to a specified schedule (i.e., seven years), resulting in increased payments as well. At the end of the specified period, the rate and payments will remain constant for the remainder of the loan.
- 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 buildings.
- Third-Party Origination
- When a lender uses another party to completely or partially originate, process, underwrite, close, fund or package the mortgages it plans to deliver to the secondary mortgage market.
- A legal concept relating to ownership of property.
- Title Insurance
- Insurance to protect the buyer and lender against losses arising from disputes over the ownership of a property.
- Title Search
- An examination of public records to determine the legal ownership of property. Usually the records are recorded with the County Recorders office. The search is usually performed by a title company using computerized records.
- The process of evaluating a loan application to determine if it meets the lender’s standards.
- Interest charged in excess of the legal rate established by law.
- VA Loan
- A long-term, low- or no-downpayment 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 1.5 percent (depending on the size of the downpayment) paid on a VA-backed loan. On a $75,000 fixed-rate mortgage with no down payment, this would amount to $1,406 either paid at closing or added to the amount financed.
- Verification of Deposit (VOD)
- A document signed by the borrower’s financial institution verifying the status and balance of that person’s financial accounts.
- Warehouse Fee
- Many mortgage firms must borrow funds on a short-term basis in order to originate loans that are to be sold later in the secondary mortgage market or to investors. When the prime rate of interest is higher on short-term loans than on mortgage loans, the mortgage firm has an economic loss that is offset by charging a warehouse fee.
- Wraparound Mortgage
- 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.