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
- A provision in a loan agreement that allows the lender to declare
the entire unpaid balance due and payable immediately if a given
condition occurs (like mortgage payments not made or some other
contractual breach).
- Adjustable Rate Mortgage (ARM)
- A mortgage with an interest rate that changes over time in line
with movements in the index. ARMs are also referred to as AML,s
(adjustable mortgage loans) or VRMs (variable rate mortgages).
- Adjustment Interval
- The length of time between interest rate changes on an ARM.
For example, a loan with an adjustment interval of one year is
called a one-year ARM, which means that the interest rate can
change once a year.
- Amortization
- Deductible expense allowed as a means of spreading the cost
of an intangible asset over a period of years. For instance, if
you pay points to take out a home equity loan and the loan proceeds
are not used for home improvements, you cannot deduct all the
points in the year paid. Instead, you divide the cost of the points
by the length of the loan and deduct only the amount that applies
to the current year.
- Annual Percentage Rate (APR)
- The annual percentage rate (APR) is an interest rate that is
different from the note rate. It is commonly used to compare loan
programs from different lenders. The Federal Truth in Lending
law requires mortgage companies to disclose the APR when they
advertise a rate. Typically the APR is found next to the rate.
- Appraisal
- A written analysis of the estimated value of a property, as
prepared by a qualified appraiser. A fee is typically charged
for a real estate appraisal because a home appraisal is time-consuming.
- 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.
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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 specific time.
- 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.
- 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.
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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 last step in a home sale at which time documents are signed
and recorded anf property ownership is transferred.
- Closing Costs
- Expenses incurred by the buyer/borrower and the seller in a
real estate or mortgage transaction.
- Commitment
- A written offer of a mortgage loan by a lending institution
. Often in the form of a letter, the commitment specifies the
terms and conditions of the mortgage loan being offered to the
prospective borrower.
- 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
- Refers to home loans other than government loans (VA and FHA).
- 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
- The document used in some states instead of a mortgage. Title
is conveyed to a trustee rather than to the borrower.
- Default
- Failure to make the required payments on a loan. Often results
in foreclosure.
- Deferred Interest
- See Negative Amortization.
- Delinquency
- Late- or non-payments of principal, interest, taxes, or insurance.
- Department of Veterans Affairs (VA)
- The Veterans Administration is a federal government agency authorized
to guarantee loans made to eligible veterans under certain conditions.
- Discount Points
- These are the funds paid at closing to obtain a particular loan
program and/or interest rate. One discount point equals one percent
of the loan amount. Discount points may be paid by either the
buyer or the seller.
- Down Payment
- The difference between the purchase price and mortgage amount.
The down payment becomes the property equity. Typically it should
be cash savings, but it can also be a gift that is not to be repaid
or a borrowed amount secured by assets.
- Due-On-Sale Clause
- A clause in a mortgage or deed of trust allowing a lender to
require immediate payment of the balance of the loan if the property
is sold (subject to the terms of the security instrument).
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- Earnest Money
- A deposit made by the potential home buyer to show that he or
she is serious about buying the house.
- 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
- A homeowner's financial interest in a property. Equity is the
difference between the fair market value of the property and the
amount still owed on its mortgage and other liens.
- Escrow
- An account established by the lender which holds money from
your monthly mortgage payment to pay property taxes and homeowner’s
insurance.
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- Fannie Mae
- See Federal
National Mortgage Association.
- Farmers Home Administration (FmHA)
- An agency within the Department of Agriculture providing financing
to farmers and other qualified rural borrowers who are unable
to obtain loans elsewhere. Funds are borrowed from the U.S. Treasury.
Generally, FmHA first mortgages preclude any home equity loan
without prior permission to the home equity lender from FmHA.
Such approval is rarely given.
- Federal Home Loan Mortgage Corporation
(FHLMC)
- A private corporation authorized by Congress to support conventional
mortgages. It also sells participation sale certificates secured
by pools of conventional mortgage loans, their principal and interest
guaranteed by the federal government through FHLBB. (Known as
Freddie Mac.)
- Federal Housing Administration (FHA)
- A Division of HUD (Housing and Urban Development), insures residential
mortgage loans made by private lenders and sets standards for
construction and underwriting.
- Federal National Mortgage Association (FNMA)
- A privately-owned corporation created by Congress to support
the secondary mortgage market. It purchases and sells residential
mortgages insured by FHA or guaranteed by VA, as well as conventional
home mortgages. (Known as Fannie Mae.)
- FHA Loan
- A government-backed mortgage loan supported by the US FHA and
the Department of Housing and Urban Development (HUD).
- FHA Mortgage Insurance
- a way of insuring an FHA loan, this insurance requires a small
fee (up to 3.8 percent of the loan amount) paid at closing, or
a portion of this fee added to each monthly payment of an FHA
loan.
- Fixed-Rate Mortgage
- A mortgage on which the interest rate is set for the term of
the loan, regardless of future interest rate fluctuations. This
makes payments precisely predictable, but it is not always the
cheapest alternative.
- 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.
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- Ginnie Mae
- See Government
National Mortgage Association.
- Government National Mortgage Association
(GNMA)
- A government-backed corporation which sells securities to raise
money to subsidize loans. (Known as Ginnie Mae.)
- Graduated Payment Mortgage (GPM)
- Loan where payment increases by a pre-determined schedule of
some index.
- Gross Monthly Income
- The total amount the borrower earns per month, not counting
any taxes or expenses. Often used in calculations to determine
whether a borrower qualifies for a particular loan.
- 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
- Insurance coverage that in the event of physical damage to a
property from fire, wind, vandalism, or other hazards.
- 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.
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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.
- 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, which is then
used to adjust the interest rate.
- Investor
- The holder of a mortgage or the permanent lender for whom the
mortgage banker services the loan. Any person or institution that
invests in mortgages.
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- Jumbo Loan
- A loan that exceeds Fannie Mae’s and Freddie Mac’s
loan limits, currently at $227,150. Also called a nonconforming
loan. Freddie Mac and Fannie Mae loans are referred to as conforming
loans.
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- Lien
- A legal claim against a property that must be paid off when
the property is sold. A mortgage or first trust deed is considered
a lien.
- Loan-To-Value Ratio
- The percentage relationship between the amount of the loan and
the appraised value or sales price (whichever is lower).
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- Margin
- The number of percentage points the lender adds to the index
rate to calculate an ARM interest rate.
- Market Value
- The highest courts of most states have defined market value.
However, the definitions usually encompass the highest price a
willing buyer would pay for the property and a willing seller
would accept, both being exposed to the property for a reasonable
period of time. Market value is not the actual price paid for
the property, that is market price.
- Mortgage Insurance
- Mortgage insurance insures a lender against loss caused by a
mortgagor's default. This insurance may cover a percentage of
or virtually all of the mortgage loan depending on the type of
mortgage insurance. See Private
Mortgage Insurance or FHA
Mortgage Insurance.
- Mortgagee
- A lender to whom real property has been pledged by a mortgage.
- Mortgagor
- A borrower pledging real property under a mortgage.
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- Negative Amortization
- An increase in a loan that occurs when the monthly payment is
not sufficient to pay the interest due. This amount of the shortfall
is added to the balance of the loan.
- Net Effective Income
- The borrower’s gross income minus federal tax.
- Non-Assumption Clause
- In a mortgage contract, a statement that disallows a new buyer
to assume a mortgage payment without the approval of the lender.
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- Origination Fee
- The amount charged by a lender to originate and close a mortgage
loan. Origination fees are usually expressed in points.
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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
- Those expenses of property which are paid in advance of their
due date and will usually be prorated upon sale, such as taxes,
insurance, rent, etc.
- Prepayment
- Any amount paid to reduce the principal balance of a loan before
the due date. Payment in full on a mortgage that may result from
a sale of the property, the owner's decision to pay off the loan
in full, or a foreclosure. In each case, prepayment means payment
occurs before the loan has been fully amortized.
- Prepayment Penalty
- A fee that may be charged to a borrower who pays off a loan
before it is due.
- Principal
- The amount of debt, not counting interest, left on a loan.
- Private Mortgage Insurance (PMI)
- Paid by a borrower to protect the lender in case of default.
PMI is typically charged to the borrower when the Loan-to-Value
Ratio is greater than 80%.
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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.
- Real Estate Settlement Procedures Act (RESPA)
- A consumer protection law that requires lenders to give borrowers
advance notice of closing costs.
- Recision
- Law that gives the borrower 3 days after signing to cancel a
contract in some cases, if the transaction uses home equity as
security.
- Recording Fees
- Paid to the county for recording a home sale, thereby making
it part of the public records.
- Renegotiable Rate Mortgage (RRM)
- A loan in which the interest rate is adjusted periodically.
Sometimes referred to as Adjustable Rate Mortgage.
- Reverse Annuity Mortgage (RAM)
- A loan under which the homeowner receives monthly payments based
on his or her accumulated equity rather than a lump sum. The loan
must be repaid at a prearranged date or upon the death of the
owner or the sale of the property.
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- Servicing
- The collection of mortgage payments from borrowers and related
responsibilities of a loan servicer.
- Settlement
- See Closing.
- Settlement Costs
- Money deposited in advance in anticipation of satisfying a debt
in the future. See Closing
Costs.
- Shared Appreciation Mortgage (SAM)
- A mortgage loan in which the lender, in exchange for a loan
with a favorable interest rate, participates in the profits (if
any) the borrower receives when the property is eventually sold.
- Survey
- The accurate mathematical measurements of land and buildings,
made with the aid of instruments.
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- Term Mortgage
- See Balloon Payment Mortgage.
- Title
- A legal document showing a person's right to or ownership of
a property.
- Title Insurance
- Title Insurance policies typically insure a homebuyer against
any title-search errors or mistakes, and against loss due to disputes
over property ownership. Title Insurance can additionally offer
protection to the lender under similar circumstances. The cost
of title insurance is usually a set value per thousand of dollars
of the total loan amount.
- Title Search
- A check of the title records to make sure that the seller is
the actual legal owner of the property, and that there are no
liens or other claims outstanding.
- Truth-in-Lending
- A requirement that lenders fully disclose credit terms and conditions,
the annual percentage rate and other mortgage financing charges
in writing to the borrower within three business days of application.
- Two-Step Mortgage
- A mortgage contract in which the interest rate changes after
a given period of time, such that the rate charged is lower for
the first part of the term of the mortgage and then market rate
or higher later in the term.
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- Underwriting
- The decision as to whether or not to accept a loan or insurance
application.
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- VA Loan
- A loan on below market terms guaranteed by the Department of
Veterans Affairs, given to former members of the armed forces.
- VA Mortgage Funding Fee
- A premium of up to 1-7/8 percent (depending on the size of the
down payment) 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.
- Variable Rate Mortgage (VRM)
- See Adjustable
Rate Mortgage.
- Verification of Deposit (VOD)
- Form signed by the borrower's bank or lender verifying the status
and balance of financial accounts.
- Verification of Employment (VOE)
- Form signed by the borrower's employer(s) verifying his/her
position and salary.
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- Wraparound
- 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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