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Mortgage Glossary

Adjustable Rate Mortgage (ARM)
Is a mortgage in which the interest rate is adjusted periodically based on a preselected index.

Amortization
A repayment method in which the amount you borrow is repaid gradually though regular monthly payments of principal and interest. During the first few years, most of each payment is applied toward the interest owed. During the final years of the loan, payment amounts are applied almost exclusively to the remaining principal.

Amortization Term
The amount of time required to amortize the loan. The amortization term is expressed as a number of months. For example, for a 15-year fixed-rate mortgage, the amortization term is 180 months.

Annual Percentage Rate (APR)
Is a 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 point and other credit cost. 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.

Assessment
A local tax levied against a property for a specific purpose, such as a sewer or street lights.

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 cost and new, probably higher, market-rate interest charges will apply.

Balloon Payment
A lump sum payment for the unpaid balance of the loan.

Borrower
One who applies for and receives a loan in the form of a mortgage with the intention of repaying the home mortgage loan in full.

Broker
An individual in the business of assisting in arranging funding or negotiating contracts for a client buy who does not loan the money himself. Brokers usually charge a fee or receive a commission for their services.

Buy-down
When the lender and/or the home builder subsidized 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.

Cash Out
Receiving money back when refinancing your present mortgage.

Certificate of Eligibility
The document given to qualified veterans which entitles them to VA guaranteed loans for homes, business, and mobile homes. Certificates of eligibility may be obtained by sending DD-214 (Separation Paper) to the local VA office with VA form 1880 (request for Certificate of Eligibility).

Closing
The time and place at which all documents for your loan are signed, dated and notarized.

Closing Costs
Any fees paid by the borrowers or sellers during the closing of the mortgage loan. This normally includes an origination fee, discount points, attorney’s fees, title insurance, survey, and any items which must be prepaid, such as taxes and insurance escrow payments.

Collateral
An asset that guarantees the repayment of a loan. The borrower risks losing the asset if the loan is not repaid according to the terms of the loan contract.

Combined Loan to Value
The relationship between the unpaid principal balances of all the mortgages on a property and the property’s appraised value.

Commitment
A promise by a lender to make a loan on specific terms or conditions to a borrower or builder. A promise by an investor to purchase mortgages from a lender with specific terms or conditions. An agreement, often in writing, between a lender and a borrower to loan money at a future date subject to the completion of paper work or compliance with stated conditions.

Construction Loan
A short term interim loan to pay for the construction of buildings or homes. These are usually designed to provide periodic disbursements to the builder as he progresses.

Contract Sale or Deed
Contract between purchaser and a seller of real estate to convey title after certain conditions have been met. It is a form of installment sale.

Conventional Loan
A mortgage not insured by FHA or guaranteed by the VA.

Credit History
A record of an individual’s open and fully repaid debts. A credit history helps a lender to determine whether a potential borrower has a history of repaying debts in a timely manner.

Credit Limit
The maximum amount that you can borrow under a home equity plan.

Credit Report
A report of an individual’s credit history prepared by a credit bureau and used by a lender in determining a loan applicant’s creditworthiness.

Credit Repository
An organization that gathers, records, updates, and stores financial and public records information about the payment records of individuals who are being considered for credit.

Debt
Amount owed to another.

Debt Service
The total amount of credit card, auto, mortgage or other debt upon which you must pay.

Debt-to-Income 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 gross monthly income.

Deed of Trust
Used in many western states, the agreement used to pledge your home or other real estate as security for a loan. Similar to a mortgage.

Default
Failure to make mortgage payments on a timely basis or to comply with other requirements of a mortgage.

Deferred interest
When a mortgage is written with a monthly payment that is less than required to satisfy the note rate, the unpaid interest is deferred by adding it to the loan balance. See negative amortization.

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.

Down Payment
The difference between the purchase price and that portion of the purchase price being financed. Most home mortgage lenders require the down payment to be paid from the buyer’s own funds. Gifts from related parties are sometimes acceptable, and must be disclosed to the lender.

Entitlement
The VA home loan benefit is called entitlement. Entitlement for a VA guaranteed home loan. This is also known as eligibility.

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
The difference between the fair market value (appraised value) of your home and your outstanding mortgage balance.

Escrow
An account held by the lender into which the home buyer pays money for tax or insurance payments. Also earnest deposits held pending loan closing.

Fair Credit Reporting Act
A consumer protection law that regulates the disclosure of consumer credit reports by consumer/credit reporting agencies and establishes procedures for correcting mistakes on one’s credit record.

Federal Home Loan Mortgage Corporation (FHLMC), Freddie Mac
Is a quasi-governmental agency that purchases conventional mortgage 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 standards for underwriting mortgages.

Federal National Mortgage Association (FNMA), 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 Home 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 ($155,250 as of 1/1/96), they are generous enough to handle moderately-priced homes almost anywhere in the country.

FHA mortgage insurance
Requires a fee (up to 2.25 percent of the loan amount) paid at closing to insure the loan with FHA. In addition, FHA mortgage insurance requires an annual fee of up to 0.5 percent of the current loan amount, paid in monthly installments. The lower the down payment, the more years the fee must be paid.

FHLMC
The Federal Home Loan Mortgage Corporation provides a secondary market for savings and loans by purchasing their conventional loans. Also known as Freddie Mac.

FICO score
A FICO score is a credit score developed by Fair Isaac & Co. Credit scoring is a method of determining the likelihood that credit users will pay their bills. Scoring has become widely accepted by lenders as a reliable means of credit evaluation. A credit score attempts to condense a borrowers credit history into a single number.

First Mortgage
A mortgage which is in first lien position, taking priority over all other liens (which are financial encumbrances).

Fixed Rate Mortgage
An interest rate which is fixed for the term of the loan. Payments as well are fixed at one amount.

Flood Insurance
Insurance that compensates for physical property damage resulting from flooding. It is required for properties located in federally designated flood areas.

FNMA
The Federal National Mortgage Association is a secondary mortgage institution which is the largest single holder of home mortgages in the United States. FNMA buys VA, FHA, and conventional mortgages from primary lenders. Also known as Fannie Mae.

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.

Good Faith Estimate
A written estimate of closing costs which a lender must provide you within three days of submitting an application.

Home Equity Line of Credit
A loan providing you with the ability to borrow funds at the time and in the amount you choose, up to a maximum credit limit for which you have qualified. Repayment is secured by the equity in your home. Simple interest (interest-only payments on the outstanding balance) is usually tax-deductible. Often used for home improvements, major purchases or expenses, and debt consolidation.

Home Equity Loan
A fixed or adjustable rate loan obtained for a variety of purposes, secured by the equity in your home. Interest paid is usually tax -deductible. Often used for home improvement or freeing of equity for investment in other real estate or investment. Recommended by many to replace or substitute for consumer loans whose interest is not tax-deductible, such as auto or boat loans, credit card debt, medical debt, and education loans.

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. See debt-to-income ratio.

HUD I Settlement Statement
A form utilized at loan closing to itemize the costs associated with purchasing the home. Used universally by mandate of HUD, the Department of Housing and Urban Development.

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 number, usually a percentage, upon which future interest rates for adjustable rate mortgages are based. Common indexes include the Cost of Funds for the Eleventh Federal District of banks or the average rate of a one year Government Treasury Security.

Interest Rate
The periodic charge, expressed as a percentage, for use of credit.

Jumbo Mortgage Loan
A mortgage loan which is larger (more than $417,000 as of 1/1/08) 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.  In some states a jumbo mortgage may start as high as $675,000.

Lender
The bank, mortgage company, or mortgage broker offering the loan.

Lien
The right to take and hold or sell the property of a debtor as a security or payment for a debt.

Loan-to-Value Ratio
The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.

Margin
An amount, usually a percentage, which is added to the index to determine the interest rate for adjustable rate mortgages.

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.

Minimum Payment
The minimum amount that you must pay, usually monthly, on a home equity loan or line of credit. In some plans, the minimum payment may be “interest only,” (simple interest). In other plans, the minimum payment may include principal and interest (amortized).

MIP (Mortgage Insurance Premium)
It is insurance from FHA to the lender against incurring a loss on account of the borrower’s default.

Mortgage
A legal document that pledges to the lender as security for payment of a debt.

Mortgage Insurance
Money paid to insure the mortgage when the down payment is less than 20 percent. See private mortgage insurance, FHA mortgage insurance.

Mortgage Loan
A loan which utilizes real estate as security or collateral to provide for repayment should you default on the terms of your loan. The mortgage or Deed of Trust is your agreement to pledge your home or other real estate as security.

Mortgagor
The borrower in a mortgage loan transaction.

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.

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 the face value of the loan.

Permanent Loan
A long term mortgage, usually ten years or more. Also called an end loan.

PITI
Principal, interest, taxes and insurance, which comprise your monthly mortgage payment.

Prepayment Penalty
Money charged for an early repayment of debt. Prepayment penalties are allowed in some form (but not necessarily imposed) in many states.

Primary Mortgage Market
Lenders making mortgage loans directly to borrower’s such as savings and loan associations, commercial banks, and mortgage companies. These lenders sometimes sell their mortgages into the secondary mortgage markets such as to FNMA or GNMA, etc.

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 payment, lenders will allow a smaller down payment – as low as 5 percent in some cases. With the smaller down payment loans, however, borrowers are usually required to carry private mortgage insurance. Private mortgage insurance will usually require an initial premium payment and may require an additional monthly fee depending on you loan’s structure.

Refinance
Obtaining a new mortgage loan on a property already owned. Often to replace existing loans on the property.

RESPA
Short for the Real Estate Settlement Procedures Act. RESPA is a federal law that allows consumers to review information on known or estimated settlement cost once after application and once prior to or at a settlement. The law requires lenders to furnish the information after application only.

Reverse Mortgage Loan
A unique home mortgage created for Seniors older than 62 years in which the lender makes periodic payments to the borrower using the borrower’s equity in the home as Satisfaction of Mortgage: The document issued by the mortgagee when the mortgage loan is paid in full. Also called a release of mortgage.

Right to Rescission
The legal right to void or cancel your mortgage contract in such a way as to treat the contract as if it never existed. Right of rescission is not applicable to mortgages made to purchase a home, but may be applicable to other mortgages, such as home equity loans.

Second Mortgage
A 2nd mortgage or home equity loan made subsequent to another mortgage and subordinate to the first one.

Secondary Mortgage Market
The place where primary mortgage lenders sell the mortgages they make to obtain more funds to originate more new loans. It provides liquidity for the lenders. Security.

Simple Interest
Interest which is computed only on the principle balance.

Title Insurance
Protection for lenders or homeowners against financial loss resulting from legal defects in the title.

Truth-In-Lending Act
A federal law prohibiting predatory lending by requiring a disclosure of credit terms using a standard format. This is intended to facilitate comparisons between the lending terms of different financial institutions.

Underwriting
The lending process of verifying information in an effort to approve a mortgage loan.

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
An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly. See Adjustable Rate Mortgages for a complete guide.

Variable Rate Mortgage (VRM)
Like 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 (VOE)
A document signed by the borrower’s employer verifying his/her position and salary.

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