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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- 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 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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