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A Glossary of Mortgage Terms
For the unprepared, mortgage terminology can be very confusing. As with any
contract, before you sign your mortgage, you should know what you are
signing. Feel free to scan through the terms below for a simplified
explanation of terms you may encounter while completing the mortgage
process.
Terms You Should Know
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
pre-selected 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.
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.
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 writin make the monthly payments on a mortgage.
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.
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 o 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 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.
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.
Investor
Money source for a lender.
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.
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.
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 t without the prior approval of the lender.
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.
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 ial 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 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.
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.
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.
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.
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