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Glossary

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 three, five or seven 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 actual note rate for the mortgage, because it takes into account points and other fees, which are considered prepaid finance 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. Meanwhile, the seller usually get a “release of liability” to complete the transaction.

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 were popular with those expecting to sell or refinance their property within a definite period of time. However, these loans are no longer available at any mainstream mortgage lender. They have being replaced by five and seven year adjustable rate mortgages.

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 directly. 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.

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

Currently, this denotes a mortgage with a loan amount of $417,000 or lower.  This is the size of loan that is eligible for securitization through either Fannie Mae or Freddie Mac.

Construction Loan

A short term loan for funding the cost of construction. The lender advances funds to the builder as the work progresses. When the construction is complete, a new permanent loan is used to refinance the balance owed.

Conventional Loan

A mortgage neither insured by the FHA, nor guaranteed by the VA. Instead, these type of loans are the one securitized by Fannie Mae and Freddie Mac – or fall into the jumbo loan market.

Conversion

The right of a borrower to convert an adjustable or balloon loan into a fixed loan. These are rare to find today, but the terms under which the loan may be converted will be spelled out in the disclosure notices and the note. There is usually a short fixed period of time, during which a conversion can take place. The new rate is usually determined by adding together the index and margin – also specified in the disclosures and the note.

Credit Score

All three major credit repositories (or agencies) provide scores for individual credit reports. Scores vary from approximately 300-850, and are based on payment history, public records, collections, and revolving credit balances and limits.

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, toward the purchase price of a property, 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 in advance 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.

Float

Between the time of application and closing, a borrower may choose to bet on interest rates decreasing by electing to “float” with the market, rather than “lock-in” the rate and fee structure. In other words, floating is essentially choosing not to lock the interest rate. Since it is the borrower’s responsibility to lock his or her rate before closing, choosing to float is considered risky and may result in a higher interest rate. Request information from your lender regarding lock-n policies and procedures.

Foreclosure

This is a legal procedure in which real estate is sold by the lender, in order to repay a defaulting borrower's debt.

Good Faith Estimate

An estimate of fees and 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. This is one of the factors used in calculating your “debt-to-income ratio”, which determines if you qualify for the loan you are applying for.

Hazard Insurance

This term is synonymous with “homeowner’s insurance.” It is a form of insurance in which the insurance company protects the insured homeowner from certain losses, due to fire, vandalism, storms and certain other natural causes.

Housing Expense Ratio

The ratio of your full monthly housing payment, to your total gross monthly income. Also called your Front 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 therefore the interest rate linked to it may increase or decrease over time.

Interest Rate

The percentage rate of interest paid back to your lender over time, above and beyond the amount of the loan.

Jumbo Loan

A loan above $417,000 currently. These limits are set by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.

Lender

The bank, mortgage company, or mortgage broker arranging for, or offering the loan directly. Many institutions only "originate" your loan and then resell it to a third party.

Life of Loan Cap

The maximum amount your interest rate can be increased 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 (LTV)

The relationship between the amount of the mortgage loan owed, 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. For purchases, the value of the property is lesser of the purchase price or the appraised value. For refinances the value is determined by an appraised value alone.

Lock (noun)

The period, expressed in days, during which a lender will guarantee a rate. Some lenders will lock rates at the time of application, while others will allow the borrower to lock the rate after the application is taken. Request information from your lender regarding their lock procedures.

Lock (verb)

The act of committing to a specific mortgage rate and set of fees, in writing. This action, taken by a borrower sometime between the application and the closing dates, may require a deposit from the borrower. Ask your lender about their lock-in policies. Opposite of float

Margin

The fixed percentage a lender adds to the quoted index rate, used to determine your new interest rate, at the time of adjustment, during the life of an adjustable rate mortgage (ARM).

Minimum Credit Score

Refers to the minimum credit rating a borrower must have in order to qualify for a specific loan program.

Monthly Housing Expense

Total principal, interest, taxes, and insurance (PITI) paid by the borrower on a monthly basis. Used with gross income to determine your debt-to-income ratio (DTI).

Mortgagee

The lender.

Mortgagor

The borrower.

Net Effective Income

Gross income less federal income tax.

Origination Fee

The fee charged by a lender in connection with making a loan, at certain specific interest rates. Usually 1% of the amount loaned, it is considered prepaid interest the same as “points”. Please refer to the Points definition below. Some loan programs, at certain interest levels, do NOT require the payment of either an origination fee or points. Ask you lender to explain your options!

Points

Prepaid interest paid by the borrower to the lender at closing, in exchange for a specific interest rate. 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 can reduces the interest rate of his loan. You may be able to reduce the rate temporarily or permanently depending on the terms. Ask you lender to explain all the options.

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. Sometime referred to as a tax and insurance escrow account.

Prepayment

The ability to pay down the principal balance of a loan, in advance of the scheduled payments – and thus reducing the term of the loan, or the amount of interest paid.

Prepayment Penalty

Lenders who impose prepayment penalties will charge borrowers a fee if they wish to repay all or part of their loan in advance of the regular schedule. Be sure to ask you lender if your loan contains such a provision!

Principal Balance

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 Ratios

There are two qualifying ratios used to qualify a potential borrower. Both ratios are calculated as percentages of the borrower’s fixed monthly expenses, compared to his or her gross monthly income. The “front ratio” or “housing expense ratio” is the percentage of the borrower’s gross income, which will be dedicated to paying the new total monthly housing payment (PITI). The “back ratio” or total debt-to-income ratio (DTI) is the percentage of the borrower’s income spent on the new total housing payment and all other minimum monthly payments for revolving and installment debt.

Please note that qualifying ratios are only a rough guideline in determining a potential borrower's credit-worthiness. Many factors such as excellent or poor credit history, amount of down payment, and size of loan will influence the decision to approve or disapprove a particular loan.

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 or total Debt-to-Income ratio (DTI)

Monthly debt and housing payments divided by gross monthly income. Also known as Back-End Ratio.

Variable Rate Mortgage

See Adjustable Rate Mortgage.