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MORTGAGE GLOSSARY

- A -

Acceleration  
The right of the lender to demand payment on the outstanding balance of a loan.

Adjustable Rate Mortgage (ARM)  
A mortgage that has a fixed rate of interest for only a set period of time, usually one, three or five years. During the initial period the interest rate is lower, and after that period it will adjust based on an index. 

Adjustment Date 
The date that the interest rate is changed for an ARM. 

Amortization Schedule
A schedule of how the loan is intended to be repaid. For example, a typical amortization schedule will include the amount borrowed, the interest rate, and the term. The result will be a month-by-month breakdown of how much every month is paid in interest versus how much is paid down on the principal.

Annual Percentage Rate (APR) 
A measure of the cost of credit, expressed as a yearly rate. It includes interest as well as other charges. Because all lenders, by federal law, follow the same rules to ensure the accuracy of the annual percentage rate, it provides consumers with a good basis for comparing the cost of loans, including mortgage plans. APR is a higher rate than the simple interest of the mortgage.

Appraisal 
Appraisals are conducted to give an estimate of the value of a property. They are conducted by certified professionals who evaluate a piece of property based on a physical inspection and the selling price of comparable houses that have recently been sold.

Appreciation
An increase in property value.

 

- B -

Balloon Loan/Mortgage  
A loan which is amortized for a longer period than the term of the loan. Usually this refers to a 30-year amortization and a five or seven-year term. At the end of the term of the loan the remaining outstanding principal on the loan is due. This final payment is known as a balloon payment. 

Bi-Weekly Mortgage 
Compared to typical mortgages that are paid once a month, bi-weekly mortgages are paid twice a month. More frequent payments reduce interest costs and decrease the length of the mortgage. 

 

- C -

Cap  
A limit on how much a monthly payment or interest rate can increase or decrease, either at each adjustment period or during the life of the mortgage.

Capital or Cash Reserves  
Extra money the borrower has in the bank on closing day. These funds go above and beyond what is needed for the down payment and closing costs. 

Consumer Financial Protection Bureau (CFPB)  
The CFPB is a regulatory agency charged with overseeing financial products and services that are offered to consumers.

Clear Title  
Titles that are marketable and free of liens or disputed legal questions as to ownership of the property.

Closing 
The final step in purchasing a property where the title is transferred from the seller to the buyer. Closing occurs at a meeting between the buyer, seller, settlement agent, and other parties such as attorneys. At the closing the seller receives payment for the property. Also known as settlement.

Closing Costs  
Closing costs are the costs involved with buying a house, typically including attorney fees, recording fees and other costs associated with the mortgage closing.

Collateral  
Security in the form of money or property pledged for the payment of a loan. For example, on a home loan, the home is the collateral and can be taken away from the borrower if mortgage payments are not made.

Construction Loan
A short term non-revolving line of credit to pay for the construction of buildings or homes. These are usually designed to provide periodic disbursements to the builder as he or she progresses.

Credit Score 
A score calculated by using a person's credit report to determine the likelihood of a loan being repaid on time. Scores range from about 360 to 840. A lower score means a person is a higher risk, while a higher score means that there is less risk.

 

- D -

Debt-to-Income Ratio 
One of many ratios used to estimate whether a borrower will be able to repay a loan. In this calculation, the lender compares the monthly debt payments of the borrower, including the new mortgage, to the borrower's monthly income. The income figure is divided into the expense figure, and the result is displayed as a percentage. The higher the percentage, the riskier the loan for the lender.

Default
The inability to make timely monthly mortgage payments or otherwise comply with mortgage terms. A loan is considered in default when payment has not been paid after 60 to 90 days. Once in default the lender can exercise legal rights defined in the contract to begin foreclosure.

Down Payment
An amount of the purchase price that the buyer pays at the time of closing. Generally, lenders require a specific down payment in order to qualify for a mortgage.

 

- E -

Earnest Money  
Money put down by a potential buyer to show that they are serious about purchasing the home; it becomes part of the down payment if the offer is accepted, is returned if the offer is rejected, or is forfeited if the buyer pulls out of the deal. During the contingency period the money may be returned to the buyer if the contingencies are not met to the buyer's satisfaction.

Encumbrance 
Anything that affects title to a property, such as loans, leases, easements, or restrictions.

Equity 
The difference between the value of the home and the borrowed principal still outstanding. As a borrower makes payments and the value of the home increases, the equity of the home generally increases.

Escrow 
Portion of a mortgage payment that is designated to pay for property taxes and hazard insurance. It is an amount "over and above" the principal and interest portion of a mortgage payment.

 

- F -

Fair Credit Reporting Act (FCRA)
Law passed by Congress to give borrowers certain rights when dealing with consumer reporting agencies, or credit bureaus. All credit bureaus are required to provide accurate credit histories to authorized businesses for use in evaluating applications for insurance, employment, credit or loans.

Fair Housing Act
A law that prohibits discrimination in all facets of the home buying process on the basis of race, color, national origin, religion, sex, familial status, or disability.

Federal Housing Administration (FHA)
An FHA loan is a mortgage issued by federally qualified lenders and insured by the FHA. FHA loans are designed for low-to-moderate income borrowers who are unable to make a large down payment.

Fixed Rate Mortgage
A mortgage where the interest rate and the term of the loan is set for the life of the loan.

Funding Fee
The Department of Veteran's Affairs (VA) charges a Funding Fee to most veterans who obtain a VA mortgage loan to help sustain the VA home loan program. Only veterans receiving VA disability are exempt from paying this fee. The VA Funding Fee is a percentage of the principal loan amount.

 

- H -

Homeowner's Insurance  
Prior to closing, the homeowners must secure property insurance on the new home. The policy must list the lender as loss payee in the event of a fire or other event.

 

- I -

Interest
A fee charged for the use of borrowing money.

Interest Rate  
The amount of interest charged on a monthly loan payment, expressed as a percentage.

- L -

Lien 
A legal claim against property that must be satisfied when the property is sold. A lien is a defect on the title and needs to be settled before transfer of ownership. 

Life Cap
A limit on the range interest rates can increase or decrease over the life of an Adjustable-Rate Mortgage (ARM).

Loan Estimate (LE)
The Loan Estimate tells you important details about the loan you have requested. The form provides you with important information, including the estimated interest rate, monthly payment, and total closing costs for the loan. The lender must provide a LE within three nosiness days of receiving your application. Formerly referred to as a Good Faith Estimate.
Loan-To-Value Ratio 
A percentage calculated by dividing the amount borrowed by the price or appraised value of the home to be purchased; the higher the LTV, the less cash a borrower is required to pay as down payment.

 

- M -

Mortgage  
A mortgage is the lien on a property that allows the lender to collect payments on the loan and to foreclose if the loan obligations are not met. 

 

- N -

Non-warrantable Condo  
A non-warrantable condominium unit is a condominium complex that does not meet the eligibility for condominium mortgage loans to be sold to Fannie Mae and Freddie Mac. 

 

- O -

Origination Fee 
When applying for a mortgage loan, borrowers are often required to pay an origination fee to the lender. This fee may include an application fee, appraisal fee, fees for all the follow-up work and other costs; usually computed as a percentage of the face value of the loan.

 

- P-

PITI 
Principal, Interest, Taxes, and Insurance: the four elements of a monthly mortgage payment; payments of principal and interest go directly towards repaying the loan while the portion that covers taxes and insurance (homeowner's and mortgage, if applicable) goes into an escrow account to cover the fees.

Points  
Mortgage points, also known as discount points, are fees paid directly to the lender at closing in exchange for a reduced interest rate. This is also called “buying down the rate,” which can lower your monthly mortgage payments. One point costs 1 percent of your mortgage amount (or $1,000 for every $100,000).

Prepayment  
Payment of the mortgage loan before the scheduled due date; may be subject to a prepayment penalty.

Principal balance
The unpaid portion of the loan amount. The principal balance does not include interest or any other charges.

Principal payment
Portion of your monthly payment that reduces the principal balance of a home loan. This term also refers to prepayments you make to the principal balance.

Private Mortgage Insurance (PMI)
PMI is arranged by the lender and provided by private insurance companies. PMI is usually required when you have a conventional loan and make a down payment of less than 20 percent of the home’s purchase price. If you’re refinancing with a conventional loan and your equity is less than 20 percent of the value of your home, PMI is also usually required. PMI protects the lender, not you, if you stop making payments on your loan.

Property Tax  
A tax charged by local government and used to fund municipal services such as schools, police, or street maintenance. The amount of property tax is determined locally by a formula, usually based on a percent per $1,000 of assessed value of the property. 

 

- R -

Recording Fees 
Charges for recording a deed with the appropriate government agency.

Real Estate Settlement Procedures Act (RESPA) 
This act was designed to protect potential homeowners and enable them to become more intelligent consumers. RESPA requires that lenders provide greater amounts of information to prospective borrowers at certain points in the loan settlement process. 

 

- T -

The Truth in Lending Act (TILA)  
TILA was a federal law enacted in 1968 with the intention of protecting consumers in their dealings with lenders and creditors. The Truth in Lending Act was implemented by the Federal Reserve through a series of regulations.

Title Insurance 
Insurance that protects the lender against any claims that arise from arguments about ownership of the property; also available for homebuyers. Most lenders require the buyer to purchase title insurance protecting the lender against loss in the event of a title defect. This charge is included in the closing costs.

Total Interest Percentage (TIP)
TIP is a new disclosure required by Congress in the Dodd-Frank Act. The TIP tells you how much interest you will pay over the life of your mortgage loan. The total interest percentage is calculated by adding up all of the scheduled interest payments, then dividing the total by the loan amount to get a percentage. The calculation assumes that you will make all your payments as scheduled. The calculation also assumes that you will keep the loan for the life of the loan.

Transfer Agent 
A bank or trust company charged with keeping a record of a company's stockholders and canceling and issuing certificates as shares are bought and sold. 

 

- U -

Up Front Mortgage Insurance Premium (UFMIP) 
Anyone who takes out an FHA loan is required to pay this premium. This lump sum is allowed to be financed into the loan and go into an escrow account set up by the U.S. Treasury Department and the funds are used to protect the government in case the borrower defaults on the FHA loan.

Underwriting 
The process of analyzing a loan application to determine the amount of risk involved in making the loan; it includes a review of the potential borrower's credit history and a judgment of the property value.

United States Department of Agriculture Loan (USDA) 
A USDA home loan is a zero down payment mortgage for eligible rural and suburban homebuyers. USDA loans are issued through the USDA loan program, also known as the USDA Rural Development Guaranteed Housing Loan Program, by the United States Department of Agriculture.

 

- V -

Veterans Affairs Loan (VA) 
Specifically reserved for our citizens who served in the military, offers a purchase transaction without a down payment; also offers an Interest Rate Reduction or 100% Cash-Out Refinance of an existing VA loan.

 

- W -

Walk Through  
This is to confirm that the home is in the same condition as the day the purchase agreement was signed. It is a buyer’s final chance to identify problems that may need to be corrected before closing. Typically, home buyers will conduct a final walk-through just prior to closing but after the previous owners have moved out. During the final walk-through, you should make sure that the seller has followed through with any repairs indicated in the purchase agreement and that everything the seller was supposed to remove or leave behind was removed or left behind.

Warrantable Condo  
A warrantable condominium unit is a condominium complex that meets the eligibility for condominium mortgage loans to be sold to Fannie Mae and Freddie Mac.