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Mortgage Glossary Adjustable Rate Mortgage (ARM): A mortgage with an interest rate that adjusts periodically, based on a pre-selected index. After the initial period, the interest rate will often adjust each year. Adjustment Date: The date that an ARMs interest rate is changed Amortization: The month-by-month monthly payment to the loan's interest and principal Annual Percentage Rate (APR): The calculation includes interest as well as other charges. Because all lenders follow the same rules when calculating the APR, it provides consumers with a good basis for comparing the cost of loans. Appraisal: A report offering an estimate of a property's fair market value; an appraisal is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property. Assessor: A government official who is assesses the value of a property for the purpose of taxation. Assignment: Transfer of ownership from one individual or company to another. Assumable Mortgage: A mortgage that can be transferred from a seller to a buyer, the seller being no longer responsible for repaying it. Balloon Mortgage: A mortgage that typically offers low rates for an initial period of time (usually 5, 7, or 10) years, after that time period the balance is due. Balloon/reset mortgages: Monthly mortgage payments based on a 30-year amortization schedule. At the end of the 5- or 7-year term you have to either pay off the remaining balance or reset the mortgage. Basis Point: 1/100th of a point. Buydown: With a buydown a seller pays an amount to the lender so that the lender can give you a lower rate. Caps: A limit on how much the interest rate or the monthly payment may change. Payment caps wont limit the amount of interest the lender is earning, so they may cause negative amortization. Cash reserves: A cash amount sometimes required to be held in reserve in addition to the down payment and closing costs, determined by the lender. Certificate of title: A document provided such as a title company that shows the property legally belongs to the current owner. Closing: When seller, buyer and lender complete a transaction and funds change hands. Closing Costs: Costs incurred to complete a loan transaction. Usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs. Cooperative (Co-op): Residents purchase stock in a cooperative corporation that owns a building. Each stockholder is then entitled to live in a specific unit and is responsible for paying a portion of the loan. Conventional mortgage: A mortgage loan that is not insured or guaranteed by the federal government. Conversion Clause: A provision in some ARMs that allows you to change the ARM to a fixed-rate loan at some point during the term. Debt To Income Ratio (DTI): Total outstanding debt as a portion of total income. Used by lenders as a measure of credit worthiness. Discount: In an ARM with an initial rate discount, the lender gives up a number of percentage points in interest to get you a lower rate usually for one year. Down Payment: Cash paid to the seller by the buyer when the home is purchased. Earnest money: Money put down by a buyer to show that he or she is serious about purchasing the home. it becomes part of the down payment. EEM: Energy Efficient Mortgage; an FHA program that helps homebuyers by helping to finance the cost of adding energy efficiency features to a new or existing home. Escrow: An account established by the lender which holds a portion your monthly mortgage payment to pay property taxes and homeowner's insurance. FHA Mortgage: A mortgage insured by the Federal Housing Administration. Fair Market Value: The estimated price that a buyer and seller agree upon without undue pressure. Fixed Rate Mortgage: A mortgage with payments that remain the same throughout the life of the loan because the interest rate and other terms do not change. Flood Insurance: Insurance that protects homeowners against losses from a flood. Forbearance: Often a lender will forgo legal action when a borrower makes satisfactory arrangements to bring mortgage payments current. Foreclosure: The legal process by which property may be sold to pay a defaulting borrower's loan. Freddie Mac: Federal Home Loan Mortgage Corporation (FHLM). A federally-chartered corporation that purchases residential mortgages, securitizes them, and sells them to investors. Good Faith Estimate: An estimate of all closing fees including pre-paid and escrow items as well as lender charges. It must be given to the borrower within three days after submission of a loan application. Home Inspection: An examination of the structure and mechanical systems to determine a home's safety, noting any latent repairs. Homeowner's Insurance: An insurance policy that combines protection of a dwelling and its contents against claims of negligence. Home Warranty: Offers protection for mechanical systems and attached appliances against unexpected repairs not covered by homeowner's insurance. HUD1 Statement: Also known as the "settlement sheet," it itemizes all closing costs. Index: The index is the rate interest-rate changes that the lender uses to decide how much the interest rate on an ARM will change over time. Intermediate-term mortgage: A mortgage loan that matures, at time of purchase, equal to or less than 20 years. Jumbo Loan: A loan in which the amount exceeds standard Fannie Mae /Freddie Mac loan limits. These limits are constantly adjusting and can be determined by going to the respective sites Loan Origination Fee: A fee charged by a lender in connection with obtaining a mortgage loan. Loan To Value Ratio (LTV): 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. Margin: The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment. Mortgage Banker: A company or individual that originates and funds mortgages. Mortgage Broker: An independent company or individual that originates but does not fund mortgages. A mortgage broker arranges mortgages with a variety of financial institutions. Mortgage Insurance: An insurance policy protecting the lender from default on the loan, typically required on Loan-To-Value ratios exceeding 80%. Negative Amortization: Negative amortization occurs when the monthly payments do not cover all the interest cost. The interest cost that isnt covered is added to the unpaid principal balance. This means that even after making many payments, you could owe more than you did at the beginning of the loan. Origination: The process of preparing, submitting, and evaluating a loan application, including a credit check, verification of employment, and a property appraisal. Origination fee: The charge for originating a loan, usually calculated in the form of points and paid at closing. PITI (Principal, Interest, Taxes and Insurance): The four components of a monthly mortgage payment. Principal and interest repay the mortgage itself. Points (Loan Discount Points): Prepaid interest used to buy a lower interest rate. Each point is equal to one percent of the total loan amount. (For example, one point on a $100,000 mortgage is $1000 or 1 percent). These points usually are collected at closing and may be paid by the borrower or the home seller, or may be split between them. PMI: Private Mortgage Insurance: Privately-owned companies that offer insurance programs for qualified borrowers with down payments of less than 20%. Pre-approve: Lender commits to lend to a potential borrower. The commitment remains as long as the borrower still meets the qualification requirements at the time of purchase. Prepayment: Payment of the mortgage loan before the scheduled due date and may be Subject to a prepayment penalty. Principal: The amount of debt left on a mortgage. Rehabilitation Mortgage: A mortgage that covers the costs of rehabilitating (repairing or Improving) a property; RESPA: Real Estate Settlement Procedures Act; a law protecting consumers from abuses requiring lenders to disclose all settlement costs, practices, and relationships Reverse Mortgage: Often used by seniors to provide funds during retirement using the equity in their homes. Generally, no payments are made on a reverse mortgage until the borrower moves or the property is sold. Secondary Mortgage Market: The market in which residential mortgages or mortgage securities are bought and sold. Settlement Statement: A standard form itemizing the seller's net proceeds and the buyer's net payment at closing. Subordinate Loan: A mortgage or lien that has a priority lower than the first mortgage. Title 1: An FHA-insured loan that allows a borrower to make renovations or repairs to their home. Title I loans are less than $7,500 Title Insurance: An insurance policy protecting the borrower from errors in the title search by providing a clear title. Title Search: A check of public records to be sure that the seller is the recognized owner of the real estate and that there are no unsettled liens or other claims against the property Underwriter: The individual trained in evaluating risks and determining rates and coverage's for them. Underwriting: the process of determining whether or not to grant credit based a review ofcredit, employment, income, assets.
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