Mortgage Glossary

 

Adjustable Rate: Mortgages with this type of interest rate will change according to their assigned index and can increase or decrease according to that index.  These mortgages are called ARM’s (adjustable-rate mortgages). 

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

Annual Percentage Rate (APR): Mortgage agreements can vary in terms of interest-rate structure, transaction fees, and late penalties and with other factors.  A mortgage contract utilizes a standardized computation such as the APR which provides borrowers with a bottom-line number they can easily compare to rates charged by other potential lenders.

By federal law, credit card companies and loan issuers must show customers the APR to facilitate a clear understanding of the actual rates they are being charged on their loans. Credit card companies like Visa, MasterCard, etc. are allowed advertise interest rates on a monthly basis (e.g. 3% per month), but are also required to clearly state the APR to customers before any agreement is signed.   Federal law requires that lenders disclose all terms under the federal Truth in Lending Act, Regulation Z.  Includes up-front costs paid to obtain the loan, and is, therefore, usually a higher amount than the interest rate stipulated in the mortgage note. This differs from annual percentage yield, which also takes compound interest into account.  The APR does not include the title insurance, appraisal fee and credit report of the consumer.

Application: The application to buy a house is a financial statement that provides the lender with information which is required to approve your loan. This statement contains your current bank accounts with balances, employers and amounts owed to other creditors and other pertinent information the lender may require.

Application Fee: This is a fee charged to process your application for a loan to buy a house, home mortgage.  This fee covers fees that are charged to cover the cost of running credit checks, property appraisals and lenders administrative costs as well.

Appraisal: This is a fee charged for the property valuation or land valuation in developing an opinion of the value of the market value of a home or land as of a specific date.   No two properties are identical and all properties differ from one another.  Lenders use this appraisal to make a mortgage loan.  

Assumption of Mortgage: When a mortgaged property is offered by the current owner for sale under an “assumption of mortgage”, the new buyer accepts the liability for the debt.  The buyer pays the equity amount to the current owner, and unless otherwise specified by the lender, the seller may remain secondarily liable for payments.

Balloon Payment: It is a large lump sum payment that is made either at specific intervals or at the end of a long-term mortgage, and is becoming common on auto and personal loans.  

Cap: On ARM loans lenders must give the lender written information on each type of loan.  This information must contain the terms and conditions of the loans, including how the index and margin rate will be calculated and how often the rate can change.  Also any limits on changes (or caps), i.e., of how high your monthly payments may go and if a negative amortization is possible.

Cash Out: Refinancing of a debt is when equity is retrieved and utilized for payoff of existing loans held in lien on the property, loan fees, taxes, and insurance. 

Ceiling: With an adjustable-rate mortgage monthly payments are uncertain unless you have a ceiling on your payment, which will keep it from increasing or a rate increase from one period to the next.  Virtually all lenders must put a ceiling on interest-rate increases over the life of the loan. 

Closing Costs: Any fees paid by the borrowers or sellers during the closing of the mortgage loan. These 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.

Conforming Loan: This is a mortgage loan that conforms to the GSE (Government Sponsored Enterprise) guidelines.   Qualifying ratios and underwriting methods are standardized to a large degree.

Contract of Sale: This agreement is between the buyer and seller of real estate (usually “rent to buy”), the contract contains the purchase price, terms, interest rate and conditions necessary to sale the property to the seller and to convey the title to the buyer.

Credit Limit: The maximum amount of money you that you can borrow from a financial institution or lender.

Debt Service: This is the cash required over a specific period for the repayment of interest and principal on a debt.

Deed of Trust: There is such a volume of paperwork for the home buyer to sign at closing that this is sometimes not read by you the buyer.  It is the security for your loan that is recorded in the public records and contains three parties.   The home buyer, trustee (title company) and the beneficiary, which is not your spouse, it’s the mortgage company.

Discount Points (or Points): The amount paid either to maintain or lower the interest rate charged.  Each point is equal to one percent (1%) of the loan amount (i.e., two points on a $100,000 mortgage would equal $2,000).

Down Payment: This is usually cash and it is used to lower the principal which in turn lowers your monthly payments.  Gifts from related parties are sometimes acceptable, and must be disclosed to the lender.

Due on Sale: A clause in a mortgage agreement providing that, if the mortgagor (the borrower) sells, transfers, or, in some instances, encumbers the property, the mortgagee (the lender) has the right to demand the outstanding balance in full.

Effective Interest Rate: This is the annual rate at which your investment grows in value when the interest is credited more than once a year.   This interest is compounded more than once a year; it determines your real interest rate more accurately through the compounding of interest. 

Encumbrance: Can be a claim and/or lien against a property by another party which usually affects the ability to transfer ownership of the property till it is discharged (paid off).

Equity: The term equity has two meanings:  equity available from an asset, the amount of money you have tied up in an asset.  In real estate it is the amount you own/have paid off on a house you are buying, you can use it as collateral to borrow against.

First Mortgage: This is a mortgage on real estate which placed a first lien on property; this mortgage takes priority over all other liens (which are financial encumbrances).

Fixed Rate: This is a FRM (fixed rate mortgage) where the interest rate on the mortgage is fixed for the term of the loan.  This means that monthly payments are fixed unless you have insurance and property taxes included in your monthly payments.

FHA Loan: FHA means Federal Housing Administration federal issued and assisted mortgage to lenders; more appropriately termed "FHA Insured Loan." This is a loan for which the Federal Housing administration insures the lender against financial losses due to the lender becoming default in their payments.

Good Faith Estimate: A written estimate that is an itemized list of fees costs that the buyer may encounter in obtaining a loan.  This list has to be provided by the lender to the buyer within three days of submitting an application to buy a house.

Grace Period: This is a period of time that a lender provides for a borrower to cancel the contract before it becomes legal in buying a house.

Gross Income: When a lender asks for this they are asking the lender for the income they make before taxes, deductions or other expenses are deducted from their earnings.   This income can also be a part-time business or additional job that the lender works.

Home Equity Line of Credit: This is a line of credit using the equity in your home; it can be substantial depending on the time you have paid on your home.  Simple interest (interest-only payments on the outstanding balance) is usually tax-deductible and the interest rate is relatively low.  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 may be 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.  This creates a lien on the borrower’s house and reduces the actual home equity.

Hazard Insurance: This is insurance that covers your property against damage caused by fire, wind, storms and other natural hazards, not flood.  In order for your home to be covered against flood damage you need to have that type of insurance.

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.   It gives each party a complete list of their incoming and outgoing funds.  The buyer should be given a copy of the HUD-1 form at least one day prior to settlement.

Index: This is used in for ARM mortgages usually an interest rate consisting of an index value plus a margin. 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: Is the price a lender charges a borrower for the use of their money and are normally expressed as a percentage over the period of the loan.

Jumbo Loan: This is a mortgage with a loan amount above the industry-standard definition of the conventional loan limits.  These loans are set by Fannie Mae, Freddie Mac and Wall Street and don’t cover the full loan amount. 

Loan to Value Ratio (LTV): A ratio that is expresses the amount of a first mortgage as a percentage of the total appraised value of property.  Loans with an LTV over 80% may require Private Mortgage Insurance, defined below.

Lock or Lock In: A commitment you obtain from a lender assuring you a particular interest rate or feature for a definite time period. Provides protection should interest rates rise between the time you apply for a loan, acquire loan approval, and, subsequently, close the loan and receive the funds you have borrowed.

Margin: Refers to a few percentage points that have been added to the index to determine the interest rate for adjustable rate mortgages and remains constant throughout the loan term.

Interest rate of ARM = Index rate + Margin.

Minimum Payment: The minimum amount that you must pay 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).

Mortgage Banker: This is a bank that originates and/or services mortgage loans, loaning you their funds and closing the loan in their name.

Mortgage Broker: A broker acts as an agent who sells mortgage loans to individuals and businesses.  Unlike a mortgage banker, brokers do not fund the loan with their own money, but work on behalf of several investors, such as mortgage bankers, S and L's, banks, or investment bankers.

Mortgage Insurance (MIP or PMI): This is insurance purchased by the borrower to insure the lender or the government against loss should you default. MIP, or Mortgage Insurance Premium, is paid on government-insured loans (FHA or VA loans) regardless of your LTV (loan-to-value). Should you pay off a government-insured loan in advance of maturity, you may be entitled to a small refund of MIP. PMI, or Private Mortgage Insurance, is paid on those loans which are not government-insured and whose LTV is greater than 80%. When you have accumulated 20% of your home's value as equity, your lender may waive PMI at your request. Please note that such insurance does not constitute a form of life insurance which pays off the loan in case of death.

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

Mortgagee: This is the lender in a mortgage loan that loans the money.

Mortgagor: This is the borrower or mortgager in a mortgage agreement.

Negative Amortization: Amortization in which the payment made is insufficient to fund complete repayment of the loan at its termination. Usually occurs when the increase in the monthly payment is limited by a ceiling. The portion of the payment which should be paid is added to the remaining balance owed.

PITI: This is a calculation used in obtaining a loan for a mortgage:  Principal, interest, taxes and insurance, which comprise your monthly mortgage payment.

Points: The amount paid either to maintain or lower the interest rate charged. Each point is equal to one percent (1%) of the loan amount (i.e., two points on a $100,000 mortgage would equal $2,000).

Prepayment Penalty: A fee paid to the lending institution for paying a loan prior to the scheduled maturity date.

Qualifying Ratios: The lender does comparisons of a borrower's debts and gross monthly income before making a loan.

Right to Rescission: This is the legal right to void or cancel your mortgage contract in such a way as to treat the contract as if it never existed.  Note the 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.

Security Interest: This is an interest that a lender takes in the borrower's property to assure repayment of the loan.

Servicing a Loan: This is the process by which a lender collects the timely payment of interest and principal from their borrowers.

Title: This is a formal document that serves as evidence of legal ownership in property and/or home.

Title Insurance: Is very important as it is indemnity insurance which protect the home buyer from financial loss from defects in title to real property (real estate) or in liens against property that the buyer is purchasing.

Transaction Fee: Real estate brokers sometimes charge a fee to buyers and sellers for preparing and storing documents.

Underwriting: The process of evaluating a real estate loan, in assessing the borrower, the property itself is scrutinized before approving a loan.

Variable Rate: An interest rate that changes periodically and used for mortgages, may be called an adjustable rate as well. Payments may increase or decrease accordingly.

VA Loan: A loan for which the Veteran's Administration insures the lender against losses the lender may incur due to your default.   This is available only to veterans possessing a Certificate of Eligibility. 

 

 View the Real Estate Glossary to learn about real estate terminology.