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Glossary
of mortgage terms.
Adjustable
Rate Mortgage (ARM)
-
A mortgage in which the interest rate is adjusted periodically based
on an index. Also called a variable rate mortgage.
Adjustment
Interval
-
For an adjustable rate mortgage, the time between changes in the
interest rate charged. The most common adjustment intervals are one,
three or five years.
Amortization
-
Literally to "kill off" (root: mort) the outstanding
balance of a loan by making equal payments on a regular schedule
(usually monthly). The payments are structured so that the borrower
pays both interest and principal with each equal payment.
Annual
Percentage Rate (APR)
-
The interest rate which reflects the cost of a mortgage as a yearly
rate. This rate is usually higher than the stated loan rate for the
mortgage, because it takes into account points and other charges.
Application
Fee
-
The fee charged by the lender to the borrower for applying for a
loan. Payment of this fee does not guarantee that a loan will be
approved. Some lenders may apply the cost of the application fee to
certain closing costs.
Appraisal
-
The determination of property value based on recent sales
information of similar properties.
Assumable
Loan
-
These loans may be passed on from a seller of a home to the buyer.
The buyer "assumes" all outstanding payments.
Balloon
Mortgage
-
Behaves like a fixed-rate mortgage for a set number of years
(usually five or seven) and then must be paid off in full in a
single "balloon" payment. Balloon loans are popular with
those expecting to sell or refinance their property within a
definite period of 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. Brokers usually charge a fee or receive a commission for
their services.
Caps
-
A set percentage amount by which an adjustable rate mortgage may
adjust each adjustment period. For adjustable loans, caps are
usually quoted as two numbers as in 2/6. The first number indicates
how much a loan may adjust at each adjustment period while the
second number indicates how much a loan may adjust over its
lifetime.
Loans
like the 3/1 and 5/1 adjustable which have an initial fixed period
are quoted with 3 numbers as in 3/2/6 which would mean that the
first adjustment may be as much as 3%, subsequent adjustments are
capped at 2% each, and the lifetime cap is 6%.
Two-Step
loans are quoted with a single cap, which is the amount by which the
loan may adjust at its single adjustment date.
Closing
Costs
-
Fees paid by the borrower when property is purchased or refinanced.
These typically include a loan origination fee, discount points,
appraisal fee, title search, title insurance, survey, taxes, deed
recording fee, and credit report charges. An N/A in the Closing
Costs category means that the information was not available from the
lender or, in the case of multiple-state lenders, differed
materially from state to state.
Commitment
-
A written letter of agreement detailing the terms and conditions by
which the lender will lend and the borrower will borrow funds to
finance a home.
Conforming
Loan
-
A mortgage loan for $275,000 or lower in the continental United
States (Alaska and Hawaii – up to $379,050).
Construction
Loan
-
A short term loan for funding the cost of construction. The lender
advances funds to the builder as the work progresses.
Conventional
Loan
-
A mortgage neither insured by the FHA nor guaranteed by the VA.
Conversion
-
The right of a borrower to convert an adjustable or balloon loan
into a fixed loan.
Credit
Rating
-
Borrowers are rated by lenders according to the borrower's
credit-worthiness or risk profile. Credit ratings are expressed as
letter grades such as A-, B, or C+. These ratings are based on
various factors such as a borrower's payment history, foreclosures,
bankruptcies and charge-offs. There is no exact science to rating a
borrower's credit, and different lenders may assign different grades
to the same borrower.
Credit
Report
-
A report to a prospective lender on the credit standing of a
prospective borrower. Used to help determine creditworthiness.
Information regarding late payments, defaults, or bankruptcies will
appear here.
Deed
-
A legal document which affects the transfer of ownership of real
estate from the seller to the buyer.
Default
-
The failure to make payments on a loan.
Down
Payment
-
Money paid by a buyer from his own funds, as opposed to that portion
of the purchase price which is financed.
Equity
-
The difference between the current market value of a property and
the principal balance of all outstanding loans.
Finance
Charge
-
The total dollar amount your loan will cost you. It includes all
interest payments for the life of the loan, any interest paid at
closing, your origination fee and any other charges paid to the
lender and/or broker. Appraisal, credit report and title search fees
are not included in the finance charge calculation.
Fixed-Rate
Mortgage
-
A mortgage where the interest rate does not change for the life of
the loan.
Foreclosure
-
A legal procedure in which real estate is sold by the lender to pay
a defaulting borrower's debt .
Good
Faith Estimate
-
An estimate of charges which a borrower is likely to incur in
connection with a loan closing.
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.
Hazard
Insurance
-
A form of insurance in which the insurance company protects the
insured from certain losses, such as fire, vandalism, storms and
certain other natural causes.
Housing
Ratio
-
The ratio of the monthly housing payment to total gross monthly
income. Also called Payment-to-Income Ratio or Front-End Ratio.
Index
-
A published interest rate not controlled by the lender to which the
interest rate on an Adjustable Rate Mortgage (ARM) is tied. The
index and the interest rate linked to it may increase or decrease.
Interest
Rate
-
The percentage of an amount of money which is paid for its use for a
specified time.
Lender
-
The bank, mortgage company, or mortgage broker offering the loan.
Many institutions only "originate" loans and then resell
the obligation to third parties.
Life
of Loan Cap
-
The maximum interest rate that can be charged during the life of the
loan. Also called Lifetime Cap. This value is often expressed as an
increment above the initial loan rate. For example, an adjustable
rate loan with an initial rate of 7.25% and a 6% lifetime cap will
never adjust above a rate of 13.25% (7.25+6.0).
Loan-To-Value
Ratio
-
The relationship between the amount of the mortgage loan and the
appraised value of the property expressed as a percentage. A LTV
ratio of 90 means that a borrower is borrowing 90% of the value of
the property and paying 10% as a down payment. For purchases, the
value of the property is assumed to be the purchase price, for
refinances the value is determined by an appraisal.
Margin
-
The amount a lender adds to the quoted index rate for an adjustable
rate loan to determine the new interest rate.
Monthly
Housing Expense
-
Total principal, interest, taxes, and insurance paid by the borrower
on a monthly basis. Used with gross income to determine
affordability.
Mortgagee
-
The lender.
Mortgagor
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The borrower.
Net
Effective Income
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Gross income less federal income tax.
Origination
Fee
-
The fee imposed by a lender to cover certain processing expenses in
connection with making a loan. Usually a percentage of the amount
loaned.
Points
-
Prepaid interest paid by the borrower to the lender at closing. A
point is equal to 1 percent of the loan amount (e.g. 1.5 points on a
$100,000 mortgage would cost the borrower $1,500). Generally, by
paying more points at closing, the borrower reduces the interest
rate of his loan and thus future monthly payments.
Prepaids
-
Expenses such as taxes, insurance and assessments which are paid in
advance of their due date and which must be paid by the buyer on a
prorated basis at closing.
Prepayment
-
The ability to pay off the remaining balance of a loan.
Prepayment
Penalty
-
Lenders who impose prepayment penalties will charge borrowers a fee
if they wish to repay part or all of their loan in advance of the
regular schedule.
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%.
Qualifying
Ratio
-
The ratio of the borrower's fixed monthly expenses to his gross
monthly income.
Settlement
Costs
-
See Closing Costs.
Tax
Lien
-
A claim against real estate for the amount of its unpaid taxes.
Title
-
A document that gives evidence of an individual's ownership of
property.
Title
Insurance
-
Insurance against loss resulting from defects of title to a
specifically described parcel of real estate.
Title
Search
-
An examination of city, town, or county records to determine the
legal ownership of real estate.
Total
Debt Ratio
-
Monthly debt and housing payments divided by gross monthly income.
Also known as Back-End Ratio.
Variable
Rate Mortgage
-
See Adjustable Rate Mortgage.
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