Mortgage Glossary Adjustable Rate Mortgage (ARM): A mortgage with an interest rate that adjusts periodically, based on a index. After an initial period, the interest rate will begin to adjust each year. The initial interest rate is lower than fixed-rate mortgages, but monthly payments can fluctuate up to a maximum amount (the "lifetime cap"). Adjustment Date: The date that an ARM's interest rate is changed Amortization: The month-by-month allocation of your monthly payment to the loan's interest and principal Annual Percentage Rate (APR): A stated interest rate that reflects closing costs, including points, origination fees and other finance charges in addition to the interest on the mortgage expressed as a yearly interest rate. The APR is usually higher than the actual interest rate. Assignment: Transfer of ownership from one individual or company to another. Lenders often assign mortgages which they transfer to Fannie Mae or some other entity which specializes in buying mortgages. Balloon Mortgage: A loan which involves payments for a specific period of time and then requires the debt to be paid in a lump sum. Balloon/Re-set Mortgages: At the end of the 5- or 7-year term you have to either pay off the remaining balance or reset the mortgage at the new interest rate. So you have the advantage of a low monthly payment, like someone with a 30-year loan, but you must pay off the loan at the end of the specified term. Basis Point: 1/100th of a point. Caps: Caps decide how much the interest rate can increase or decrease at each adjustment period and over the life of the loan. Most ARM's have a lifetime cap that limits the amount your interest rate can increase. Closing: The meeting between the seller, buyer and lender in which the property and funds legally change hands and all documents are signed. 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 charges. Conventional Mortgage: A mortgage loan that is not insured or guaranteed by the federal government. Debt To Income Ratio (DTI): Total outstanding debt as a portion of total income. Used by lenders as a measure of credit worthiness. Down Payment: Cash paid to the seller by the buyer when the home is purchased. It is generally the difference between the purchase price and the mortgage amount. Equity: It is the difference between the fair market value, or selling price, less costs and current mortgage amount. Escrow: An account established by the lender which holds money from your monthly mortgage payment to pay property taxes and homeowner's insurance. FHA mortgage: A mortgage insured by the Federal Housing Administration. Typically, FHA mortgages require somewhat lower down payments and less stringent qualification requirements. The borrower buys mortgage insurance, the premium can be paid monthly or added to the total loan amount Fixed Rate Mortgage: A mortgage with an interest rate that cant change for the term of the loan. The most common terms are for a period of 30 or 15 years. It is the most common mortgage for many homebuyers because the monthly payments are stable. Forbearance: Often a lender will forgo legal action when a borrower makes satisfactory arrangements to bring mortgage payments up to date. Foreclosure: The legal process by which property is auctioned off to pay a defaulting borrower's loan. Forty Year Mortgage: Mortgages with forty year terms that typically offer a higher rate than a thirty year term. Gross Monthly Income: The total amount a borrower earns each month, before any expenses or taxes are deducted. Hybrid Adjustable Rate Mortgage: The interest rate is fixed typically, for the first three, five, seven or ten years and then adjusts annually. Interest Only Mortgage: Interest only loans allow interest only payments. Index: Commonly used benchmarks for ARM's are the LIBOR and the U.S. Treasury Bill. The rates for indexes reflect current market conditions. ARM rates adjust accordingly to reflect changes in the index. Intermediate-Term Mortgage: A mortgage loan with a term of less than 20 years. Jumbo Loan: The loan amount exceeds Fannie Mae /Freddie Mac loan limits. These limits are constantly changing 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): The amount of mortgage ebt expressed as a percentage. It is the ratio of the mortgage loan to the value of the property. Mortgage Banker: A company or individual that originates and funds mortgages, which are then sold in the secondary market. 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%. PITI (Principal, Interest, Taxes and Insurance): The four components of a monthly mortgage payment. Principal and interest repay the mortgage itself; taxes and insurance pay for homeowners insurance and property taxes. 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) Principal: The amount of debt left on a mortgage, minus interest, remaining on a loan. 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:The statement shows the seller's net proceeds and the buyer's net payment at closing. A standard form itemizing real estate commissions, loan fees, points, and initial escrow amounts. Short Term Adjustable Rate Mortgages: Short tem ARM's that readjust every year. They typically carry a lower interest rate. Subordinate Loan: A mortgage or lien that has a priority lower than the first mortgage. Title Insurance: An insurance policy protecting the borrower from errors in the title search, by providing a clear title. Title Search: A review or search of court records to determine the legal ownership and any outstanding claims against the property. Often performed by Title Search Company's. Underwriter: The insurance company function that involves researching and evaluating insurance applicants to decide which ones are insurable. 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