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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