ADJUSTABLE RATE MORTGAGE (ARM)
A mortgage in which the interest rate is adjusted periodically according to a pre-selected
index. Adjustments may occur at different intervals depending upon the loan program. Some
adjust yearly while others may stay fixed for a term of one, three, five or seven years
then adjust yearly. The terms, adjustment schedule and index that the loan is based upon
vary by loan program. To protect the borrower, "caps" are put into place to
limit the amount of payment adjustment.
AMORTIZATION
A gradual debt reduction of the amount borrowed. This is accomplished by making
installment payments (usually monthly) according to a predetermined schedule.
ANNUAL PERCENTAGE RATE (A.P.R.)
The total cost of credit on a yearly basis expressed as a percentage. It takes into
account the total cost of the loan including origination fee, points, prepaid interest,
etc. The APR is typically higher than the note rate.
APPRAISAL
A written report made by a licensed person as to the current estimate of value. The term
also refers to the process by which this estimate is obtained. The
"loan-to-value" is usually based on the appraisal value not the sales price.
BALLOON LOAN
The balance of the mortgage that is due in a lump sum at a specified date in the future.
Usually three, five or seven years.
BUY DOWNS
Temporary - An up front fee paid to the lender (by the borrower, seller or builder) to
reduce the monthly payments for a home mortgage. Typically the monthly payment reduction
is only the first one to three years.
Permanent - An up front fee
paid to the lender (by the borrower, seller or builder) to reduce the monthly payments for
a home mortgage for the life of the loan. (Sometimes referred to as points.)
CAP
A limit on the amount of adjustment in the interest rate, payment amount or both on an ARM
mortgage. Caps may be applied to each adjustment period and/or over the life of the loan.
Example, a 2/6 would denote a 2% cap on the rate per adjustment period and 6% over the
term of the mortgage.
CLOSING
The conclusion of the transaction. Includes but not limited to the delivery of the deed,
signing of mortgage note and the disbursement of funds to the seller and other interested
parties.
CLOSING COSTS
Costs associated with obtaining
a mortgage. They include fees such as origination, appraisal, credit report, title
insurance, attorney, processing , underwriting , etc. Local custom and loan type dictate
what party to the transaction pays which fees. Prepaid items such as daily interest,
property insurance and real estate taxes are not typically considered closing costs.
CONDOMINIUM
A form of ownership of real property. The purchaser receives title to a particular unit
and a proportionate interest in the common areas. A condominium generally defines each
unit as a separately owned space to the interior surfaces of the perimeter walls,
floors, and ceilings.
CONVENTIONAL LOAN
A mortgage loan which meets the underwriting guidelines of FNMA or FHLMC, as opposed to a
government backed loan.
CREDIT SCORE
A means in which the lender may evaluate the credit rating of the potential borrower using
standardized guidelines. The credit score takes into account such things as the amount of
money owed in relationship to the credit limit, the number of open credit lines, the
length of the credit history, the number of recent credit inquiries and numerous other
factors.
DEBT RATIO
The total of all of the borrowers monthly payments including the proposed house payment
(PITI), divided by the borrowers gross income.
EQUITY
The difference between the fair market value of the property and the total amount of money
owed on that property.
ESCROW
A transaction in which a third party, acting as the agent for the buyer and seller,
carries out instructions of both parties and assumes the responsibilities of handling the
paperwork and disbursement of funds.
FHA (Federal Housing
Administration)
The division of the Department of Housing and Urban Development who's main directive is
the insuring of residential mortgage loans made by private lenders. FHA does not lend or
provide funds for lending, they only insure the loan.
FEDERAL HOME LOAN MORTGAGE
CORPORATION (FHLMC)
A private corporation authorized by Congress. It sells participation sales certificates
secured by pools of conventional mortgage loans. Also known as Freddie Mac.
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (FNMA)
A tax paying corporation created by Congress to support the secondary mortgage market. It
purchases and sells residential mortgages insured by FHA or guaranteed by VA as well as
conventional home mortgages, Also known as Fannie Mae.
FUNDING
FEE
The fee paid and forwarded to the Veterans Administration to guarantee a VA home loan
provided to a Veteran.
GOOD FAITH ESTIMATE
A document provided at application that provides estimates for all costs associated with
obtaining and closing the home loan.
INDEX
An interest rate indicator used to determine changes in the mortgage interest rate for an
ARM loan. Commonly used indices include; 6-Month, 1, 3, or 5-Year Treasury Bills.
LTV
See LOAN-TO-VALUE
LOAN-TO-VALUE
The relationship between the amount of the mortgage loan and the value of the security,
expressed as a percentage of the appraised value.
MARGIN
The percentage added to the index at each adjustment of an ARM to determine the borrowers
new interest rate.
MORTGAGE
A conveyance of an interest in real property given as security for the payment of an
obligation.
MORTGAGEE
A person to whom property is conveyed as security of a loan made by such person of firm.
MORTGAGE BROKER
A person or company that originates home loans and sells that mortgage to any one of a
number of mortgage lenders. the mortgage broker has the ability to find the best rate
and/or program among the many sources available to him. He is usually compensated by the
lender whom he places the loan with. there is no extra fees paid by the borrower for this
service.
MORTGAGE INSURANCE PREMIUM
(MIP)
Mortgage insurance on an FHA insured loan. Unlike conventional loans it is required
regardless of the loan-to-value.
MORTGAGOR
The borrower of money. One who gives as security a mortgage or deed of trust on real
property.
NOTE RATE
The interest rate on a loan.
ORIGINATION FEE
A fee charged to the buyer for work involved in the evaluation, preparation and submission
of the mortgage loan.
PITI
An acronym for the total monthly payment. Principal, Interest, Taxes and Insurance.
POINTS
A fee expressed as a percentage of the loan amount. One point equals one percent. Points
are usually collected at closing. Payment of discount points usually results in a lower
interest rate on the loan.
PREPAIDS
The amounts that are put into an escrow account at closing, usually including real estate
taxes and insurance.
PREPAID INTEREST
That amount of money collected at closing to cover the interest for the loan from the
settlement date to the end of the month..
PRIVATE MORTGAGE INSURANCE
(PMI)
A private company which insures the mortgage lender on a conventional loan against loss
caused by a mortgagor's default. It may cover all or part of the loss. It is usually not
required for loan-to-values of 80% or less.
SECONDARY MARKET
A system where existing mortgages are bought and sold.
TITLE INSURANCE
An insurance policy which insures you and/or the lender against errors in the title search
of the property.
UNDERWRITING
Where the complete loan package is reviewed and approved or denied based upon standardized
guidelines for that particular loan program. Sometimes referred to as the Loan Committee.
VA
Veterans Administration. The division of the government that guarantees VA loans made to
Veterans. |
