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Mortgage Terms Explained
adjustable-rate mortgage (ARM)
A mortgage that changes interest rate periodically based upon the
changes in a specified index.
adjustment date
The date on which the interest rate changes for an adjustable-rate
mortgage (ARM).
adjustment period
The period that elapses between the adjustment dates for an adjustable-rate
mortgage (ARM).
amortization
The repayment of a mortgage loan by installments with regular payments
to cover the principal and interest.
amortization term
The amount of time required to amortize the mortgage loan. The amortization
term is expressed as a number of months. For example, for a 30-year
fixed-rate mortgage, the amortization term is 360 months.
annual percentage rate (APR)
The cost of a mortgage stated as a yearly rate; includes such items
as interest, mortgage insurance, and loan origination fee (points).
application
A form, commonly referred to as a 1003 form, used to apply for a
mortgage and to provide information regarding a prospective mortgagor
and the proposed security.
appraisal
A written analysis of the estimated value of a property prepared
by a qualified appraiser.
appraiser (return to top)
A person qualified by education, training, and experience to estimate
the value of real property and personal property.
appreciation
An increase in the value of a property due to changes in market
conditions or other causes. The opposite of depreciation.
asset
Anything of monetary value that is owned by a person. Assets include
real property, personal property, and enforceable claims against
others (including bank accounts, stocks, mutual funds, and so on).
assignment
The transfer of a mortgage from one person to another.
assumable mortgage
A mortgage that can be taken over ("assumed") by the buyer
when a home is sold.
assumption
The transfer of the seller's existing mortgage to the buyer.
assumption clause
A provision in an assumable mortgage that allows a buyer to assume
responsibility for the mortgage from the seller. The loan does not
need to be paid in full by the original borrower upon sale or transfer
of the property.
assumption fee
The fee paid to a lender (usually by the purchaser of real property)
resulting from the assumption of an existing mortgage.
balance sheet (return to top)
A financial statement that shows assets, liabilities, and net worth
as of a specific date.
balloon mortgage
A mortgage that has level monthly payments that will amortize it
over a stated term but that provides for a lump sum payment to be
due at the end of an earlier specified term.
balloon payment
The final lump sum payment that is made at the maturity date of
a balloon mortgage.
bankrupt
A person, firm, or corporation that, through a court proceeding,
is relieved from the payment of all debts after the surrender of
all assets to a court-appointed trustee.
bankruptcy
A proceeding in a federal court in which a debtor who owes more
than his or her assets can relieve the debts by transferring his
or her assets to a trustee.
before-tax income
Income before taxes are deducted.
beneficiary
The person designated to receive the income from a trust, estate,
or a deed of trust.
binder
A preliminary agreement, secured by the payment of an earnest money
deposit, under which a buyer offers to purchase real estate.
biweekly payment mortgage
A mortgage that requires payments to reduce the debt every two weeks
(instead of the standard monthly payment schedule). The 26 (or possibly
27) biweekly payments are each equal to one-half of the monthly
payment that would be required if the loan were a standard 30-year
fixed-rate mortgage, and they are usually drafted from the borrower's
bank account. The result for the borrower is a substantial savings
in interest.
blanket mortgage
The mortgage that is secured by a cooperative project, as opposed
to the share loans on individual units within the project.
bond
An interest-bearing certificate of debt with a maturity date. An
obligation of a government or business corporation. A real estate
bond is a written obligation usually secured by a mortgage or a
deed of trust.
breach
A violation of any legal obligation.
bridge loan
A form of second trust that is collateralized by the borrower's
present home (which is usually for sale) in a manner that allows
the proceeds to be used for closing on a new house before the present
home is sold. Also known as "swing loan."
broker
A person who, for a commission or a fee, brings parties together
and assists in negotiating contracts between them.
buydown mortgage
A temporary buydown is a mortgage on which an initial lump sum payment
is made by any party to reduce a borrower's monthly payments during
the first few years of a mortgage. A permanent buydown reduces the
interest rate over the entire life of a mortgage.
call option (return to top)
A provision in the mortgage that gives the mortgagee the right to
call the mortgage due and payable at the end of a specified period
for whatever reason.
cap
A provision of an adjustable-rate mortgage (ARM) that limits how
much the interest rate or mortgage payments may increase or decrease.
capital improvement
Any structure or component erected as a permanent improvement to
real property that adds to its value and useful life.
cash-out refinance
A refinance transaction in which the amount of money received from
the new loan exceeds the total of the money needed to repay the
existing first mortgage, closing costs, points, and the amount required
to satisfy any outstanding subordinate mortgage liens. In other
words, a refinance transaction in which the borrower receives additional
cash that can be used for any purpose.
Certificate of Eligibility
A document issued by the federal government certifying a veteran's
eligibility for a Department of Veterans Affairs (VA) mortgage.
Certificate of Reasonable Value (CRV)
A document issued by the Department of Veterans Affairs (VA) that
establishes the maximum value and loan amount for a VA mortgage.
certificate of title
A statement provided by an abstract company, title company, or attorney
stating that the title to real estate is legally held by the current
owner.
chain of title
The history of all of the documents that transfer title to a parcel
of real property, starting with the earliest existing document and
ending with the most recent.
change frequency
The frequency (in months) of payment and/or interest rate changes
in an adjustable-rate mortgage (ARM).
clear title
A title that is free of liens or legal questions as to ownership
of the property.
closing
A meeting at which a sale of a property is finalized by the buyer
signing the mortgage documents and paying closing costs. Also called
"settlement."
closing cost item (return to top)
A fee or amount that a home buyer must pay at closing for a single
service, tax, or product. Closing costs are made up of individual
closing cost items such as origination fees and attorney's fees.
Many closing cost items are included as numbered items on the HUD-1
statement.
closing costs
Expenses (over and above the price of the property) incurred by
buyers and sellers in transferring ownership of a property. Closing
costs normally include an origination fee, an attorney's fee, taxes,
an amount placed in escrow, and charges for obtaining title insurance
and a survey. Closing costs percentage will vary according to the
area of the country.
closing statement
Also referred to as the HUD1. The final statement of costs incurred
to close on a loan or to purchase a home.
cloud on title
Any conditions revealed by a title search that adversely affect
the title to real estate. Usually clouds on title cannot be removed
except by a quitclaim deed, release, or court action.
collateral
An asset (such as a car or a home) 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.
collection
The efforts used to bring a delinquent mortgage current and to file
the necessary notices to proceed with foreclosure when necessary.
co-maker
A person who signs a promissory note along with the borrower. A
co-maker's signature guarantees that the loan will be repaid, because
the borrower and the co-maker are equally responsible for the repayment.
See endorser.
commission
The fee charged by a broker or agent for negotiating a real estate
or loan transaction. A commission is generally a percentage of the
price of the property or loan.
commitment letter
A formal offer by a lender stating the terms under which it agrees
to lend money to a home buyer. Also known as a "loan commitment."
common areas
Those portions of a building, land, and amenities owned (or managed)
by a planned unit development (PUD) or condominium project's homeowners'
association (or a cooperative project's cooperative corporation)
that are used by all of the unit owners, who share in the common
expenses of their operation and maintenance. Common areas include
swimming pools, tennis courts, and other recreational facilities,
as well as common corridors of buildings, parking areas, means of
ingress and egress, etc.
Community Home Improvement Mortgage Loan
An alternative financing option that allows low- and moderate-income
home buyers to obtain 95 percent financing for the purchase and
improvement of a home in need of modest repairs. The repair work
can account for as much as 30 percent of the appraised value.
community property (return to top)
In some western and southwestern states, a form of ownership under
which property acquired during a marriage is presumed to be owned
jointly unless acquired as separate property of either spouse.
comparables
An abbreviation for "comparable properties"; used for
comparative purposes in the appraisal process. Comparables are properties
like the property under consideration; they have reasonably the
same size, location , and amenities and have recently been sold.
Comparables help the appraiser determine the approximate fair market
value of the subject property.
condominium
A real estate project in which each unit owner has title to a unit
in a building, an undivided interest in the common areas of the
project, and sometimes the exclusive use of certain limited common
areas.
condominium conversion
Changing the ownership of an existing building (usually a rental
project) to the condominium form of ownership.
construction loan
A short-term, interim loan for financing the cost of construction.
The lender makes payments to the builder at periodic intervals as
the work progresses.
consumer reporting agency (or bureau)
An organization that prepares reports that are used by lenders to
determine a potential borrower's credit history. The agency obtains
data for these reports from a credit repository as well as from
other sources.
contingency
A condition that must be met before a contract is legally binding.
For example, home purchasers often include a contingency that specifies
that the contract is not binding until the purchaser obtains a satisfactory
home inspection report from a qualified home inspector.
contract
An oral or written agreement to do or not to do a certain thing.
conventional mortgage
A mortgage that is not insured or guaranteed by the federal government.
convertibility clause
A provision in some adjustable-rate mortgages (ARMs) that allows
the borrower to change the ARM to a fixed-rate mortgage at specified
timeframes after loan origination.
convertible ARM
An adjustable-rate mortgage (ARM) that can be converted to a fixed-rate
mortgage under specified conditions.
cooperative (co-op)
A type of multiple ownership in which the residents of a multiunit
housing complex own shares in the cooperative corporation that owns
the property, giving each resident the right to occupy a specific
apartment or unit.
corporate relocation
Arrangements under which an employer moves an employee to another
area as part of the employer's normal course of business or under
which it transfers a substantial part or all of its operations and
employees to another area because it is relocating its headquarters
or expanding its office capacity.
cost of funds index (COFI)
An index that is used to determine interest rate changes for certain
adjustable-rate mortgage (ARM) plans. It represents the weighted-average
cost of savings, borrowings, and advances of the 11th District members
of the Federal Home Loan Bank of San Francisco.
covenant
A clause in a mortgage that obligates or restricts the borrower
and that, if violated, can result in foreclosure.
credit
An agreement in which a borrower receives something of value in
exchange for a promise to repay the lender at a later date.
credit history (return to top)
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 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.
See merged credit report.
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 (return to top)
An amount owed to another.
deed
The legal document conveying title to a property.
deed-in-lieu
A deed given by a mortgagor to the mortgagee to satisfy a debt and
avoid foreclosure.
deed of trust
The document used in some states instead of a mortgage; title is
conveyed to a trustee.
default
Failure to make mortgage payments on a timely basis or to comply
with other requirements of a mortgage.
delinquency
Failure to make mortgage payments when mortgage payments are due.
deposit
A sum of money given to bind the sale of real estate, or a sum of
money given to ensure payment or an advance of funds in the processing
of a loan.
depreciation
A decline in the value of property; the opposite of appreciation.
down payment
The part of the purchase price of a property that the buyer pays
in cash and does not finance with a mortgage.
due-on-sale provision (return to top)
A provision in a mortgage that allows the lender to demand repayment
in full if the borrower sells the property that serves as security
for the mortgage.
earnest money deposit
A deposit made by the potential home buyer to show that he or she
is serious about buying the house.
easement
A right of way giving persons other than the owner access to or
over a property.
effective age
An appraiser's estimate of the physical condition of a building.
The actual age of a building may be shorter or longer than its effective
age.
effective gross income
Normal annual income including overtime that is regular or guaranteed.
The income may be from more than one source. Salary is generally
the principal source, but other income may qualify if it is significant
and stable.
encumbrance
Anything that affects or limits the fee simple title to a property,
such as mortgages, leases, easements, or restrictions.
endorser
A person who signs ownership interest over to another party. Contrast
with co-maker.
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
A homeowner's financial interest in a property. Equity is the difference
between the fair market value of the property and the amount still
owed on its mortgage.
escrow
An item of value, money, or documents deposited with a third party
to be delivered upon the fulfillment of a condition. For example,
the deposit by a borrower with the lender of funds to pay taxes
and insurance premiums when they become due, or the deposit of funds
or documents with an attorney or escrow agent to be disbursed upon
the closing of a sale of real estate.
escrow account
The account in which a mortgage servicer holds the borrower's escrow
payments prior to paying property expenses.
escrow analysis
The periodic examination of escrow accounts to determine if current
monthly deposits will provide sufficient funds to pay taxes, insurance,
and other bills when due.
escrow collections (return to top)
Funds collected by the servicer and set aside in an escrow account
to pay the borrower's property taxes, mortgage insurance, and hazard
insurance.
escrow disbursements
The use of escrow funds to pay real estate taxes, hazard insurance,
mortgage insurance, and other property expenses as they become due.
escrow payment
The portion of a mortgagor's monthly payment that is held by the
servicer to pay for taxes, hazard insurance, mortgage insurance,
lease payments, and other items as they become due. Known as "impounds"
or "reserves" in some states.
estate
The ownership interest of an individual in real property. The sum
total of all the real property and personal property owned by an
individual at time of death.
eviction
The lawful expulsion of an occupant from real property.
examination of title
The report on the title of a property from the public records or
an abstract of the title.
Fair Credit Reporting Act (return to top)
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.
fair market value
The highest price that a buyer, willing but not compelled to buy,
would pay, and the lowest a seller, willing but not compelled to
sell, would accept.
Fannie Mae
A congressionally chartered, shareholder-owned company that is the
nation's largest supplier of home mortgage funds.
Fannie Mae's Community Home Buyer's Program
An income-based community lending model, under which mortgage insurers
and Fannie Mae offer flexible underwriting guidelines to increase
a low- or moderate-income family's buying power and to decrease
the total amount of cash needed to purchase a home. Borrowers who
participate in this model are required to attend pre-purchase home-buyer
education sessions.
Federal Housing Administration (FHA)
An agency of the U.S. Department of Housing and Urban Development
(HUD). Its main activity is the insuring of residential mortgage
loans made by private lenders. The FHA sets standards for construction
and underwriting but does not lend money or plan or construct housing.
fee simple
The greatest possible interest a person can have in real estate.
FHA mortgage
A mortgage that is insured by the Federal Housing Administration
(FHA). Also known as a government mortgage.
finder's fee
A fee or commission paid to a mortgage broker for finding a mortgage
loan for a prospective borrower.
first mortgage
A mortgage that is the primary lien against a property.
fixed-rate mortgage (FRM)
A mortgage in which the interest rate does not change during the
entire term of the loan.
flood insurance
Insurance that compensates for physical property damage resulting
from flooding. It is required for properties located in federally
designated flood areas.
foreclosure (return to top)
The legal process by which a borrower in default under a mortgage
is deprived of his or her interest in the mortgaged property. This
usually involves a forced sale of the property at public auction
with the proceeds of the sale being applied to the mrotgage debt.
fully amortized ARM
An adjustable-rate mortgage (ARM) with a monthly payment that is
sufficient to amortize the remaining balance, at the interest accrual
rate, over the amortization term.
good faith estimate
An estimate of charges which a borrower is likely to incur in connection
with a settlement.
hazard insurance (return to top)
Insurance protecting against loss to real estate caused by fire,
some natural causes, vandalism, etc., depending upon the terms of
the policy.
housing ratio
The ratio of the monthly housing payment in total (PITI - Principal,
Interest, Taxes, and Insurance) divided by the gross monthly income.
This ratio is sometimes referred to as the top ratio or front end
ratio.
HUD
The U.S. Department of Housing and Urban Development.
index (return to top)
A published interest rate to which the interest rate on an Adjustable
Rate Mortgage (ARM) is tied. Some commonly used indeces include
the 1 Year Treasury Bill, 6 Month LIBOR, and the 11th District Cost
of Funds (COFI).
lien (return to top)
An encumbrance against property for money due, either voluntary
or involuntary.
lifetime cap
A provision of an ARM that limits the highest rate that can occur
over the life of the loan.
loan to value ratio (LTV)
The ratio of the amount of your loan to the appraised value of the
home. The LTV will affect programs available to the borrower and
generally, the lower the LTV the more favorable the terms of the
programs offered by lenders.
lock-in
A written agreement guaranteeing the home buyer a specified interest
rate provided the loan is closed within a set period of time. The
lock-in also usually specifies the number of points to be paid at
closing.
margin (return to top)
The number of percentage points a lender adds to the index value
to calculate the ARM interest rate at each adjustment period. A
representative margin would be 2.75%.
mortgage
A legal document that pledges a property to the lender as security
for payment of a debt
mortgage disability insurance
A disability insurance policy which will pay the monthly mortgage
payment in the event of a covered disability of an insured borrower
for a specified period of time.
mortgage insurance (MI)
Insurance written by an independent mortgage insurance company protecting
the mortgage lender against loss incurred by a mortgage default.
Usually required for loans with an LTV of 80.01% or higher.
mortgagee
The person or company who receives the mortgage as a pledge for
repayment of the loan. The mortgage lender.
mortgagor
The mortgage borrower who gives the mortgage as a pledge to repay.
non-conforming loan (return to top)
Also called a jumbo loan. Conventional home mortgages not eligible
for sale and delivery to either Fannie Mae (FNMA) or Freddie Mac
(FHLMC) because of various reasons, including loan amount, loan
characteristics or underwriting guidelines. Non-conforming loans
usually incur a rate and origination fee premium.The current non-conforming
loan limit is ,601 and above.
note
A written agreement containing a promise of the signer to pay to
a named person, or order, or bearer, a definite sum of money at
a specified date or on demand.
origination fee
A fee imposed by a lender to cover certain processing expenses in
connection with making a real estate loan. Usually a percentage
of the amount loaned, such as one percent.
owner financing (return to top)
A property purchase transaction in which the property seller provides
all or part of the financing.
Planned Unit Developments (PUD)
A subdivision of five or more individually owned lots with one or
more other parcels owned in common or with reciprocal rights in
one or more other parcels.
PITI
Principal, interest, taxes and insurance--the components of a monthly
mortgage payment.
points
Charges levied by the mortgage lender and usually payable at closing.
One point represents 1% of the face value of the mortgage loan.
prepaids
Those expenses of property which are paid in advance of their due
date and will usually be prorated upon sale, such as taxes, insurance,
rent, etc.
prepayment penalty
A charge imposed by a mortgage lender on a borrower who wants to
pay off part or all of a mortgage loan in advance of schedule.
principal
Amount of debt, not including interest. The face value of a note
or mortgage.
private mortgage insurance (PMI)
Insurance provided by nongovernment insurers that protects lenders
against loss if a borrower defaults. Fannie Mae generally requires
private mortgage insurance for loans with loan-to-value (LTV) percentages
greater than 80%.
qualifying ratios
The ratio of your fixed monthly expenses to your gross monthly income,
used to determine how much you can afford to borrow. The fixed monthly
expenses would include PITI along with other obligations such as
student loans, car loans, or credit card payments.
rate cap
A limit on how much the interest rate can change, either at each
adjustment period or over the life of the loan.
rate lock-in (return to top)
A written agreement in which the lender guarantees the borrower
a specified interest rate, provided the loan closes within a set
period of time.
rebate
Compensation received from a wholesale lender which can be used
to cover closing costs or as a refund to the borrower. Loans with
rebates often carry higher interest rates than loans with "points"
(see above).
refinancing
The process of paying off one loan with the proceeds from a new
loan using the same property as security.
residential mortgage credit report (RMCR)
A report requested by your lender that utilizes information from
at least two of the three national credit bureaus and information
provided on your loan application.
seller carry back (return to top)
An agreement in which the owner of a property provides financing,
often in combination with an assumed mortgage.
survey
A print showing the measurements of the boundaries of a parcel of
land, together with the location of all improvements on the land
and sometimes its area and topography.
tenants-in-common (return to top)
An undivided interest in property taken by two or more persons.
The interest need not be equal. Upon death of one or more persons,
there is no right of survivorship.
title
The evidence one has of right to possession of land.
title insurance
Insurance against loss resulting from defects of title to a specifically
described parcel of real property.
title search
An investigation into the history of ownership of a property to
check for liens, unpaid claims, restrictions or problems, to prove
that the seller can transfer free and clear ownership.
total debt ratio
Monthly debt and housing payments divided by gross monthly income.
Also known as Obligations-to-Income Ratio or Back-End Ratio.
Truth-in-Lending Act (return to top)
A federal law requiring a disclosure of credit terms using a standard
format. This is intended to facilitate comparisons between the lending
terms of different financial institutions.
Veterans Administration (VA)
A government agency guaranteeing mortgage loans with no down payment
to qualified veterans.
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