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Shopping
for a mortgage? If you are one of the tens of thousands of
today's home shoppers, you probably have discovered that mortgage
lending has a language all its own. For example, you've probably
heard about "points", "margins", and "repayment
penalties." Should you look for an "assumption?"
What are "acceleration clauses?" For the unprepared,
this new terminology can be quite confusing. As with any contract,
before you sign your mortgage, you should know what you are
signing.
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- Acceleration
Clause
- Allows
the lender to speed up the rate at which your loan comes
due or even to demand immediate payment of the entire outstanding
balance of the loan should your default on you loan.
- Adjustable
Rate Mortgage (ARM)
- Is
a mortgage in which the interest rate is adjusted periodically
based on a preselected index. Also sometimes known as the
renegotiable rate mortgage, the variable rate mortgage or
the Canadian rollover mortgage.
- Adjustment
Interval
- On
an adjustable rate mortgage, the time between changes in
the interest rate and/or monthly payment, typically one,
three or five years, depending on the index.
- Amortization
- Means
loan payment by equal periodic payments calculated to pay
off the debt at the end of a fixed period, including accrued
interest on the outstanding balance.
- Annual
Percentage Rate (APR)
- An
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 points and other credit costs. The APR allows
homebuyers 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."
- 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 costs and new, possibly higher, market-rate interest
charge will apply.
(Return
to the top of the page.)
- Balloon
(Payment) Mortgage
- Usually
a short-term fixed-rate loan which involves small payments
for a certain period of time and one large payment for the
remaining amount of the principal at a time specified in
the contract.
- 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.
- Buydown
- When
the lender and/or the home builder subsidizes 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.
(Return
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- Caps
(Interest)
- Consumer
safeguards which limit the amount the interest rate on an
adjustable rate mortgage may change per year and/or the life
of the loan.
- Caps
(Payment)
- Consumer
safeguards which limit the amount monthly payments on an
adjustable rate mortgage may change.
- Closing
- The
meeting between the buyer, seller and lender or their agents
where the property and funds legally change hands. Also called
settlement.
- Closing
Costs
- Usually
include an origination fee, discount points, appraisal fee,
title search and insurance, survey, taxes, deed recording
fee, credit report charge and other costs assessed at settlement.
The costs of closing usually are about 3 percent to 6 percent
of the mortgage amount.
- Commitment
- An
agreement, often in writing, between a lender and a borrower
to loan money at a future date subject to the completion
of paperwork or compliance with stated conditions.
- Construction
Loan
- A
short term interim loan for financing the cost of construction.
The lender advances funds to the builder at periodic intervals
as the work progresses.
- Conventional
Loan
- A
mortgage not insured by FHA or guarantee by the VA or Farmers
Home Administration (FmHA).
- Credit
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 net effective income (FHA/VA loans) or gross
monthly income (Conventional loans). See Housing Expenses-to-Income Ratio.
(Return
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- Deed
of Trust
- In
many states, this document is used in place of a mortgage
to secure the payment of a note.
- Default
- Failure
to meet legal obligations in a contract, specifically, failure
to make the monthly payments on a mortgage.
- Deferred
Interest
- See
Negative Amortization.
- Delinquency
- Failure
to make payments on time. This can lead to foreclosure.
- 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.
- Discount
Points
- Prepaid
interest assessed at closing by the lender. Each point is
equal to 1 percent of the loan amount (e.g. two points on
a $100,000 mortgage would cost $2,000).
- Down
Payment
- Money
paid to make up the difference between the purchase price
and mortgage amount. Down payments usually are 10 percent
to 20 percent of the sales price on Conventional loans, and
no money down up to 5 percent on FHA and VA loans.
- Due-On-Sale
Clause
- A
provision in a mortgage or deed of trust that allows the
lender to demand immediate payment of the balance of the
mortgage if the mortgage holder sells the home.
(Return
to the top of the page.)
- Earnest
Money
- Money
given by a buyer to a seller as part of the purchase price
to bind a transaction or assure payment.
- Equal
Credit Opportunity Act (ECOA)
- Is
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 and current indebtedness,
also referred to as the owner's interest.
- Escrow
- Refers
to a neutral third party who carries out the instructions
of both the buyer and seller to handle all the paperwork
of settlement or "closing." Escrow may also refer
to an account held by the lender into which the homebuyer
pays money for tax or insurance payments.
(Return
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- Fannie
Mae
- See
Federal National Mortgage Association.
- Farmers
Home Administration (FmHA)
- Provides
financing to farmers and other qualified borrowers who are
unable to obtain loans elsewhere.
- Federal
Home Loan Mortgage Corporation (FHLMC)
- Also
called Freddie Mac, is a quasi-governmental agency
that purchases conventional mortgages 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 standard for
underwriting mortgages.
- Federal
National Mortgage Association (FNMA)
- Also
known as 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
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, they are generous enough to handle
moderate-priced homes almost anywhere in the country.
- FHA
Mortgage Insurance
- Requires
a small fee (up to 3 percent of the loan amount) paid at
closing or a portion of this fee added to each monthly payment
of an FHA loan to insure the loan with FHA. On a 9.5 percent
$75,000 30-year fixed-rate FHA loan, this fee would amount
t o either $2,250 at closing or an extra $31 a month for
the life of the loan. In addition, FHA mortgage insurance
requires an annual fee of 0.5 percent of the current loan
amount, the more years the fee must be paid.
- Fixed-Rate
Mortgage
- A
mortgage on which the interest rate is set for the term of
the loan.
- Foreclosure
- A
legal procedure in which property securing debt is sold by
the lender to pay a defaulting borrower's debt.
- Freddie
Mac
- See
Federal Home Loan Mortgage Corporation.
(Return
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- Ginnie
Mae
- See
Government National Mortgage Association.
- Government
National Mortgage Association (GNMA)
- Also
known as Ginnie Mae, provides sources of funds for
residential mortgages, insured or guaranteed by FHA or VA.
- Graduated
Payment Mortgage (GPM)
- A
type of flexible-payment mortgage where the payments increase
for a specified period of time and then level off. This type
of mortgage has negative amortization built into it.
- Gross
Monthly Income
- The
total amount the borrower earns per month, before any expenses
are deducted.
- Guarantee
- A
promise by one party to pay a debt or perform an obligation
contracted by another if the original party fails to pay
or perform according to a contract.
(Return
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- Hazard
Insurance
- A
form of insurance in which the insurance company protects
the insured from specified losses, such as fire, windstorm
and the like.
- Housing
Expenses-to-Income Ratio
- The
ratio, expressed as a percentage, which results when a borrower's
housing expenses are divided by his/her net effective income
(FHA/VA loans) or gross monthly income (Conventional loans).
(Return
to the top of the page.)
- 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
published interest rate against which lenders measure the
difference between the current interest rate on an adjustable
rate mortgage and that earned by other investments (such
as one- three-, and five-year U.S. Treasury Security yields,
the monthly average interest rate on loans closed by savings
and loan institutions, and the monthly average Costs-of-Funds
incurred by savings and loans), which is then used to adjust
the interest rate on an adjustable mortgage up or down.
- Investor
- Money
source for a lender.
(Return
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- Jumbo
Loan
- A
loan which is larger (more than $203,150) 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.
(Return
to the top of the page.)
- Lien
- A
claim upon a piece of property for the payment or satisfaction
of a debt or obligation.
- Loan-To-Value
Ratio
- The
relationship between the amount of the mortgage loan and
the appraised value of the property expressed as a percentage.
(Return
to the top of the page.)
- Margin
- The
amount a lender adds to the index on an adjustable rate mortgage
to establish the adjusted interest rate.
- 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.
- Mortgage
Insurance
- Money
paid to insure the mortgage when the down payment is less
than 20 percent. See Private Mortgage Insurance
or FHA Mortgage Insurance.
- Mortgagee
- The
lender.
- Mortgagor
- The
borrower or homeowner.
(Return
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- 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 homebuyer ends up owing more than
the original amount of the loan.
- Net
Effective Income
- The
borrower's gross income minus federal income tax.
- Non-Assumption
Clause
- A
statement in a mortgage contract forbidding the assumption
of the mortgage without the prior approval of the lender.
(Return
to the top of the page.)
- 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 face value of the loan.
(Return
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- PITI
- Principal,
interest, taxes, and insurance. Also called monthly housing
expense.
- Points
- See
Discount Points
- Power
of Attorney
- A
legal document authorizing one person to act on behalf of
another.
- Prepaids
- Expenses
necessary to create an escrow account or to adjust the seller's
existing escrow account. Can include taxes, hazard insurance,
private mortgage insurance and special assessments.
- Prepayment
- A
privilege in a mortgage permitting the borrower to make payments
in advance of their due date.
- Prepayment
Penalty
- Money
charged for an early repayment of debt. Prepayment penalties
are allowed in some form (but not necessarily imposed) in
36 states and the District of Columbia.
- 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 payments,
lenders will allow a smaller down payment-as low as 5 percent
in some cases. With the smaller down payments loans, however,
borrowers are usually required to carry private mortgage
insurance. Private mortgage insurance will require an initial
premium payment of 1.0 percent to 5.0 percent of your mortgage
amount and may require an additional monthly fee depending
on your loan's structure. On a $75,000 house with a 10 percent
down payments, this would mean either an initial premium
payment of $2,025 to $3,375, or an initial premium of $675
to $1,130 combined with a monthly payment of $25 to $30.
(Return
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- Realtor
- A
real estate broker or an associate holding active membership
in a local real estate board affiliated with the National
Association of Realtors.
- Recision
- The
cancellation of a contract. With respect to mortgage refinancing,
the law that gives the homeowner three days to cancel a contract
in some cases once it is signed if the transaction uses equity
in the home as security.
- Recording
Fees
- Money
paid to the lender for recording a home sale with the local
authorities, thereby making it part of the public records.
- Renegotiable
Rate Mortgage (RRM)
- A
loan in which the interest rate is adjusted periodically.
See Adjustable Rate Mortgage.
- Real
Estate Settlement Procedures Act (RESPA)
- RESPA
is a federal law that allows consumers to review information
on known or estimated settlement costs once after application
and once prior to or at settlement. The law requires lenders
to furnish information after application only.
- Reverse
Annuity Mortgage (RAM)
- A
form of mortgage in which the lender makes periodic payments
to the borrower using the borrower's equity in the home as
security.
(Return
to the top of the page.)
- Servicing
- All
the steps and operations a lender perform to keep a loan
in good standing, such as collection of payments, payment
of taxes, insurance, property inspections and the like.
- Settlement
- See
Closing.
- Settlement
Costs
- See
Closing Costs.
- Shared
Appreciation Mortgage (SAM)
- A
mortgage in which a borrower receives a below-market interest
rate in return for which a lender (or another investor such
as a family member or other partner) receives a portion of
the future appreciation in the value of the property. May
also apply to mortgages where the borrower shares the monthly
principal and interest payments with another party in exchange
for a part of the appreciation.
- Survey
- A
measurement of land, prepared by a registered land surveyor,
showing the location of the land with reference to known
points, its dimensions, and the location and dimensions of
any building.
(Return
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- Term
Mortgage
- See
Balloon Payment Mortgage.
- Title
- A
document that gives evidence of an individual's ownership
of property.
- Title
Insurance
- A
policy, usually issued by a Title Insurance company, which
insures a homebuyer against errors in the title search. The
cost of the policy is usually a function of the value of
the property, and is often borne by the purchaser and/or
seller.
- Title
Search
- An
examination of municipal records to determine the legal ownership
of property. Usually is performed by a title company.
- Truth-in-Lending
- A
federal law requiring disclosure of the Annual
Percentage Rate to homebuyers shortly after they apply
for the loan.
- Two-Step
Mortgage
- A
mortgage in which the borrower receives a below-market interest
rate for a specified number of years (most often seven or
10 years), and then receives a new interest rate adjusted
(within certain limits) to market conditions at that time.
The lender sometimes has the option to call the loan, due
within 30 days notice at the end of seven or 10 years. Also
called "Super Seven" or "Premier" mortgage.
(Return
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- Underwriting
- The
decision whether to make a loan to a potential homebuyer
based on credit, employment, assets, and other factors and
the matching of this risk to an appropriate rate and term
or loan amount.
(Return
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- VA
Loan
- A
long-term, low-or no-down payment loan guaranteed by the
Department of Veterans Affairs. Restricted to individuals
qualified by military service or other entitlements.
- VA
Mortgage Funding Fee
- A
premium of up to 2 percent (depending on the size of the
down payment) paid on a VA-backed loan. On a $75,000 30-year
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 Mortgage (VRM)
- See
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
- A
document signed by the borrower's employer verifying his/her
position and salary.
(Return
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- Wraparound
- Results
when an existing assumable loan is combined with a new loan,
resulting in an interest rate somewhere between the old rate
and the current market rate. The payments are made to a second
lender or the previous homeowner, who then forwards the payments
to the first lender after taking the additional amount off
the top.
(Return
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