Glossary of Mortgage Terminology
• 2/1 Buy Down Mortgage
• Acceleration Clause
• Additional Principal Payment
• Adjustable-Rate Mortgage (ARM)
• Adjusted Basis
• Adjustment Date
• Adjustment Period
• Affordability Analysis
• Amortization
• Amortization Term
• Annual Percentage Rate (APR)
• Appraisal
• Appraised Value
• Asset
• Assignment
• Assumability
• Assumption Fee
• Balance Sheet
• Balloon Mortgage
• Balloon Payment
• Before-tax Income
• Biweekly Payment Mortgage
• Bridge Loan
• Broker
• Buydown
• Cap
• Certificate of Eligibility
• Certificate of Reasonable Value (CRV)
• Change Frequency
• Closing
• Closing Costs
• Compound Interest
• Consumer Reporting Agency (or Bureau)
• Conversion Clause
• Credit Report
• Credit Risk Score
• Deed of Trust
• Default
• Delinquency
• Deposit
• Discount
• Down Payment
• Effective Gross Income
• Equity
• Escrow
• Escrow Disbursements
• Escrow Payment
• Fannie Mae
• FHA Mortgage
• FICO Score
• First Mortgage
• Fixed Installment
• Fixed-Rate Mortgage (FRM)
• Fully Amortized ARM
• GNMA
• Growing-Equity Mortgage (GEM)
• Guarantee Mortgage
• Housing Expense Ratio
• HUD-1 statement
• Hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM)
• Index
• Initial Interest Rate
• Installment
• Insured Mortgage
• Interest
• Interest Accrual Rate
• Interest Rate Buydown Plan
• Interest Rate Ceiling
• Interest Rate Floor
• Late Charge
• Lease-Purchase Mortgage Loan
• Liabilities
• Lifetime Payment Cap
• Lifetime Rate Cap
• Line of Credit
• Liquid Asset
• Loan
• Loan-to-Value (LTV) Percentage
• Lock-In Period
• Margin
• Maturity
• Monthly Fixed Installment
• Mortgage
• Mortgage Banker
• Mortgage Broker
• Mortgage Insurance
• Mortgage Insurance Premium (MIP)
• Mortgage Life Insurance
• Mortgagor
• Negative Amortization
• Net Worth
• Non Liquid Asset
• Note
• Origination Fee
• Owner Financing
• Payment Change Date
• Periodic Payment Cap
• Periodic Rate Cap
• PITI Reserves
• Points
• Prepayment Penalty
• Pre-Approval
• Prime Rate
• Principal
• Principal Balance
• Principal, Interest, Taxes, and Insurance (PITI)
• Private Mortgage Insurance (PMI)
• Qualifying Ratios
• Rate Lock
• Real Estate Agent
• Real Estate Settlement Procedures Act (RESPA)
• Realtor
• Recording
• Refinance
• Revolving Liability
• Secondary Mortgage Market
• Security
• Seller Carry-back
• Servicer
• Standard Payment Calculation
• Step-Rate Mortgage
• Third-Party Origination
• Total Expense Ratio
• Treasury Index
• Truth-in-Lending
• Two-step Mortgage
• Underwriting
• VA Mortgage
• "Wrap Around" Mortgage
2/1 Buy Down Mortgage
The 2/1 Buy Down Mortgage allows the borrower to qualify at below market rates so they can borrow more. The initial starting interest rate increases by 1% at the end of the first year and adjusts again by another 1% at the end of the second year. It then remains at a fixed interest rate for the remainder of the loan term.
Borrowers often refinance at the end of the second year to obtain the best long term rates; however, even keeping the loan in place for three full years or more will keep their average interest rate in line with the original market conditions.
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Acceleration Clause
Provision in a mortgage that allows the lender to demand
payment of the entire principal balance if a monthly
payment is missed or some other default occurs.
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Additional
Principal Payment
A way to reduce the remaining balance on the loan by
paying more than the scheduled principal amount due.
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Adjustable-Rate
Mortgage (ARM)
A mortgage with an interest rate that changes during the
life of the loan according to movements in an index rate.
Sometimes called AMLs (adjustable mortgage loans) or VRMs
(variable-rate mortgages).
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Adjusted
Basis
The cost of a property plus the value of any capital
expenditures for improvements to the property minus any
depreciation taken.
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Adjustment
Date
The date that the interest rate changes on an
adjustable-rate mortgage (ARM).
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Adjustment
Period
The period elapsing between adjustment dates for an
adjustable-rate mortgage (ARM).
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Affordability Analysis
An analysis of a buyers 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.
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Amortization
The gradual repayment of a mortgage loan, both principal
and interest, by installments.
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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.
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Annual
Percentage Rate (APR)
The cost of credit, expressed as a yearly rate including
interest, mortgage insurance, and loan origination
fees. This allows the buyer to compare loans, however APR
should not be confused with the actual note rate.
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Appraisal
A written analysis prepared by a qualified appraiser and estimating the value of a property.
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Appraised
Value
An opinion of a property's fair market value, based on an
appraiser's knowledge, experience, and analysis of the
property.
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Asset
Anything owned of monetary value including real property,
personal property, and enforceable claims against others
(including bank accounts, stocks, mutual funds, etc.).
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Assignment
The transfer of a mortgage from one person to another.
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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.
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Assumption
Fee
The fee paid to a lender (usually by the purchaser of
real property) when an assumption takes place.
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Balance
Sheet
A financial statement that shows assets, liabilities, and
net worth as of a specific date.
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Balloon
Mortgage
A mortgage with level monthly payments that amortizes
over a stated term but also requires that a lump sum
payment be paid at the end of an earlier specified term.
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Balloon
Payment
The final lump sum paid at the maturity date of a balloon
mortgage.
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Before-tax
Income
Income before taxes are deducted.
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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.
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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."
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Broker
An individual or company that brings borrowers and lenders together for the
purpose of loan origination.
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Buydown
When
the seller, builder or buyer pays an amount of money up
front to the lender to reduce monthly payments during the
first few years of a mortgage.Buydowns can occur in both
fixed and adjustable rate mortgages.
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Cap
Limits how much the interest rate or the monthly payment
can increase, either at each adjustment or during the
life of the mortgage. Payment caps don't limit the amount
of interest the lender is earning and may cause negative
amortization.
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Certificate of Eligibility
A document issued by the federal government certifying a
veteran’s eligibility for a Department of Veterans
Affairs (VA) mortgage.
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Certificate
of Reasonable Value (CRV)
A document issued by the Department of Veterans Affairs
(VA) that establishes the maximum value and loan amount
for a VA mortgage.
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Change
Frequency
The frequency (in months) of payment and/or interest rate
changes in an adjustable-rate mortgage (ARM).
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Closing
A meeting held to finalize the sale of a property. The
buyer signs the mortgage documents and pays closing
costs. Also called "settlement."
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Closing
Costs
These are 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.
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Compound
Interest
Interest paid on the original principal balance and on
the accrued and unpaid interest.
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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 from other sources.
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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.
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Credit
Report
A report detailing an individual's credit history that is
prepared by a credit bureau and used by a lender to
determine a loan applicant's creditworthiness.
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Credit Risk Score
A credit score measures a consumer’s credit risk
relative to the rest of the U.S. population, based on the
individual’s credit usage history. The credit score most
widely used by lenders is the FICOŽ score,
developed by Fair, Issac and Company. This 3-digit
number, ranging from 300 to 850, is calculated
by a mathematical equation that evaluates many types
of information that are on your credit report. Higher
FICOŽ scores represents lower credit risks, which
typically equate to better loan terms. In general, credit
scores are critical in the mortgage loan underwriting process.
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Deed
of Trust
The document used in some states instead of a mortgage.
Title is conveyed to a trustee.
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Default
Failure to make mortgage payments on a timely basis or to
comply with other requirements of a mortgage.
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Delinquency
Failure to make mortgage payments on time.
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Deposit
This is a sum of money given to bind the sale of real
estate, or a sum of money given to ensure payment or an
advance of funds in the processing of a loan.
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Discount
In an ARM with an initial rate discount, the lender gives
up a number of percentage points in interest to reduce
the rate and lower the payments for part of the mortgage
term (usually for one year or less). After the discount
period, the ARM rate usually increases according to its
index rate.
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Down
Payment
Part of the purchase price of a property that is paid in
cash and not financed with a mortgage.
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Effective
Gross Income
A borrowers normal annual income, including overtime that
is regular or guaranteed.Salary is usually the principal
source, but other income may qualify if it is significant
and stable.
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Equity
The amount of financial interest in a property. Equity is
the difference between the fair market value of the
property and the amount still owed on the mortgage.
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Escrow
An item of value, money, or documents deposited with a
third party to be delivered upon the fulfillment of a
condition. For example, the deposit of funds or documents
into an escrow account to be disbursed upon the
closing of a sale of real estate.
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Escrow Disbursements
The use of escrow funds to pay real estate taxes, hazard
insurance, mortgage insurance, and other property
expenses as they become due.
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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.
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Fannie
Mae
A congressionally chartered, shareholder-owned company
that is the nation's largest supplier of home mortgage
funds.
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FHA
Mortgage
A mortgage that is insured by the Federal Housing
Administration (FHA). Also known as a government
mortgage.
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FICO Score
FICOŽ scores are the most widely used credit score in
U.S. mortgage loan underwriting. This 3-digit number, ranging from
300 to 850, is calculated by a mathematical equation that
evaluates many types of information that are on your credit report.
Higher FICOŽ scores represent lower credit risks, which
typically equate to better loan terms.
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First
Mortgage
The primary lien against a property.
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Fixed
Installment
The monthly payment due on a mortgage loan including
payment of both principal and interest.
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Fixed-Rate
Mortgage (FRM)
A mortgage interest that are fixed throughout the entire
term of the loan.
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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.
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GNMA
A government-owned corporation that assumed
responsibility for the special assistance loan program
formerly administered by Fannie Mae. Popularly known as
Ginnie Mae.
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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.
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Guarantee Mortgage
A mortgage that is guaranteed by a third
party.
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Housing
Expense Ratio
The percentage of gross monthly income budgeted to pay
housing expenses.
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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.
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Hybrid ARM (3/1
ARM, 5/1 ARM, 7/1 ARM)
A combination fixed rate and adjustable rate
loan - also called 3/1,5/1,7/1 - can offer the best of
both worlds. A lower interest rates (like ARMs) and a
fixed payment for a longer period of time than most
adjustable rate loans. For example, a "5/1
loan" has a fixed monthly payment and interest for
the first five years and then turns into a traditional
adjustable rate loan, based on then-current rates for the
remaining 25 years. It's a good choice for people who
expect to move or refinance, before or shortly after, the
adjustment occurs.
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Index
The index is the measure of interest rate changes a
lender uses to decide the amount an interest rate on an
ARM will change over time.The index is generally a
published number or percentage, such as the average
interest rate or yield on Treasury bills. Some index
rates tend to be higher than others and some more
volatile.
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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."
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Installment
The regular periodic payment that a borrower agrees to
make to a lender.
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Insured
Mortgage
A mortgage that is protected by the Federal Housing
Administration (FHA) or by private mortgage insurance
(MI).
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Interest
The fee charged for borrowing money.
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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.
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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.
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Interest
Rate Ceiling
For an adjustable-rate mortgage (ARM), the maximum
interest rate, as specified in the mortgage note.
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Interest
Rate Floor
For an adjustable-rate mortgage (ARM), the
minimum interest rate, as specified in the mortgage note.
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Late
Charge
The penalty a borrower must pay when a payment is made a
stated number of days (usually 15) after the due date.
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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 downpayment.
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Liabilities
A person's financial obligations. Liabilities include
long-term and short-term debt.
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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.
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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.
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Line
of Credit
An agreement by a commercial bank or other financial
institution to extend credit up to a certain amount for a
certain time.
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Liquid
Asset
A cash asset or an asset that is easily converted into
cash.
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Loan
A sum of borrowed money (principal) that is generally
repaid with interest.
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Loan-to-Value
(LTV) Percentage
The relationship between the principal balance of the
mortgage and the appraised value (or sales price if it is
lower) of the property. For example, a $100,000 home with
an $80,000 mortgage has an LTV of 80 percent.
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Lock-In Period
The guarantee of an interest rate for a specified period of time by a
lender, including loan term and points, if any, to be paid at
closing. Short term locks (under 21 days), are usually available after lender
loan approval only. However, many lenders may permit a borrower to lock a
loan for 30 days or more prior to submission of the loan application.
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Margin
The number of percentage points the lender adds to the
index rate to calculate the ARM interest rate at each
adjustment.
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Maturity
The date on which the principal balance of a loan becomes
due and payable.
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Monthly
Fixed Installment
That 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.
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Mortgage
A legal document that pledges a property to the lender as
security for payment of a debt.
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Mortgage
Banker
A company that originates mortgages exclusively for
resale in the secondary mortgage market.
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Mortgage
Broker
An individual or company that brings
borrowers and lenders together for the purpose of
loan origination.
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Mortgage Insurance
A contract that insures the lender against loss caused by
a mortgagor's default on a government mortgage or
conventional mortgage. Mortgage insurance can be issued
by a private company or by a government agency.
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Mortgage
Insurance Premium (MIP)
The amount paid by a mortgagor for mortgage insurance.
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Mortgage
Life Insurance
A type of term life insurance In the event that the
borrower dies while the policy is in force, the debt is
automatically paid by insurance proceeds.
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Mortgagor
The borrower in a mortgage agreement.
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Negative Amortization
Amortization means that monthly payments are large enough
to pay the interest and reduce the principal on your
mortgage. Negative amortization occurs when the monthly
payments do not cover all of the interest cost. The
interest cost that isn't covered is added to the unpaid
principal balance. This means that even after making many
payments, you could owe more than you did at the
beginning of the loan. Negative amortization can occur
when an ARM has a payment cap that results in monthly
payments not high enough to cover the interest due.
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Net
Worth
The value of all of a person's assets, including cash.
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Non
Liquid Asset
An asset that cannot easily be converted into cash.
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Note
A legal document that obligates a borrower to repay a
mortgage loan at a stated interest rate during a
specified period of time.
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Origination
Fee
A fee paid to a lender for processing a loan application.
The origination fee is stated in the form of points. One
point is 1 percent of the mortgage amount.
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Owner
Financing
A property purchase transaction in which the party
selling the property provides all or part of the
financing.
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Payment
Change Date
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.
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Periodic
Payment Cap
A limit on the amount that payments can increase or
decrease during any one adjustment period.
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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.
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PITI
Reserves
A cash amount that a borrower must have on hand after
making a down payment and paying all closing costs for
the purchase of a home. The principal, interest, taxes,
and insurance (PITI) reserves must equal the amount that
the borrower would have to pay for PITI for a predefined
number of months (usually three).
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Points
A point is equal to one percent of the principal amount
of your mortgage. For example, if you get a mortgage for
$165,000 one point means $1,650 to the lender.Points
usually are collected at closing and may be paid by the
borrower or the home seller, or may be split between
them.
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Prepayment Penalty
A fee that may be charged to a borrower who pays off a
loan before it is due.
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Pre-Approval
The process of determining how much money you will be
eligible to borrow before you apply for a loan.
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Prime
Rate
The interest rate that banks charge to their preferred
customers.Changes in the prime rate influence changes in
other rates, including mortgage interest rates.
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Principal
The amount borrowed or remaining unpaid. The part of the
monthly payment that reduces the remaining balance of a
mortgage.
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Principal
Balance
The outstanding balance of principal on a mortgage not
including interest or any other charges.
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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 that are paid
into an escrow account each month or not.
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Private
Mortgage Insurance (PMI)
Mortgage insurance provided by a private mortgage
insurance company to protect lenders against loss if a
borrower defaults. Most lenders generally require MI for
a loan with a loan-to-value (LTV) percentage in excess of
80 percent.
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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.
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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.
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Real
Estate Agent
A person licensed to negotiate and transact
the sale of real estate on behalf of the property owner.
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Real
Estate Settlement Procedures Act (RESPA)
A consumer protection law that requires lenders to give
borrowers advance notice of closing costs.
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RealtorŽ
A real estate broker or an associate who is an active
member in a local real estate board that is affiliated
with the National Association of Realtors.
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Recording
The noting in the registrar’s office of the details
of a properly executed legal document, such as a deed, a
mortgage note, a satisfaction of mortgage, or an
extension of mortgage, thereby making it a part of the
public record.
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Refinance
Paying off one loan with the proceeds from a new loan
using the same property as security.
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Revolving Liability
A credit arrangement, such as a credit card, that allows
a customer to borrow against a preapproved line of credit
when purchasing goods and services.
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Secondary Mortgage Market
Where existing mortgages are bought and sold.
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Security
The
property that will be pledged as collateral for a loan.
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Seller
Carry-back
An agreement in which the owner of a property provides
financing, often in combination with an assumable
mortgage. See owner financing.
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Servicer
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.
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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.
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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.
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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.
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Total
Expense Ratio
Total obligations as a percentage of gross monthly income
including monthly housing expenses plus other monthly
debts.
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Treasury
Index
An index used to determine interest rate
changes for certain adjustable-rate mortgage (ARM) plans.
Based on the results of auctions that the U.S. Treasury
holds for its Treasury bills and securities or derived
from the U.S. Treasury's daily yield curve, which is
based on the closing market bid yields on actively traded
Treasury securities in the over-the-counter market.
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Truth-in-Lending
A federal law that requires lenders to fully disclose, in
writing, the terms and conditions of a mortgage,
including the annual percentage rate (APR) and other
charges.
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Two-step
Mortgage
An adjustable-rate mortgage (ARM) with one interest rate
for the first five or seven years of its mortgage term
and a different interest rate for the remainder of the
amortization term.
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Underwriting
The process of evaluating a loan application to determine
the risk involved for the lender. Underwriting involves
an analysis of the borrower's creditworthiness and the
quality of the property itself.
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VA
Mortgage
A mortgage that is guaranteed by the Department of
Veterans Affairs (VA). Also known as a government
mortgage.
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"Wrap Around" Mortgage
A mortgage that includes the remaining balance on an
existing first mortgage plus an additional amount
requested by the mortgagor. Full payments on both
mortgages are made to the "Wrap Around"
mortgagee, who then forwards the payments on the first
mortgage to the first mortgagee. These mortgages may not
be allowed by the first mortgage holder, and if
discovered, could be subject to a demand for full
payment.
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