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 home-buyers 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 home-buyer
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 taxpaying 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 US 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 $203,150) 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
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 home-buyer 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.
- Rescission
- 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 home-buyer 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 home-buyers 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 home-buyer 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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