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.
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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 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). 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)
- 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.
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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 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.
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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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- 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 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.
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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 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.
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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, 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.
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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 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.
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- 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.
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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
- 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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