Glossary of Mortgage Terms
Shopping
for a mortgage? If you are one of the
tens of thousands of today's home
shoppers, you probably have discovered
that mortgage lending has a language
all its own. For example, you've
probably heard about
"points",
"margins", and
"repayment penalties."
Should you look for an
"assumption?" What are
"acceleration clauses?" For
the unprepared, this new terminology
can be quite confusing. As with any
contract, before you sign your
mortgage, you should know what you are
signing.
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-
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 you default on you
loan.
-
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
ncriable rate mortgage or the
Canadian rollover mortgage.
- Adjustment
Interncl
-
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.
-
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 nclue 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.
(Return
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-
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.
(Return
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-
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.
-
The
meeting between the buyer, seller
and lender or their agents, where
the property and funds legally
change hands. Also called
settlement.
-
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 are usually about
3 percent to 6 percent of the
mortgage amount.
- Commitment
-
An
agreement, often in writing,
between a lender and a borrower to
loan money at a future date
subject to the completion of
paperwork or compliance with
stated conditions.
- Construction
Loan
-
A
short term interim loan for
financing the cost of
construction. The lender adncnces
funds to the builder at periodic
interncls as the work progresses.
- Conventional
Loan
-
A
mortgage not insured by FHA or
guaranteed by the nc 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/nc loans) or gross monthly
income (Conventional loans). See Housing
Expenses-to-Income Ratio.
(Return
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-
In
many states, this document is used
in place of a mortgage to secure
the payment of a note.
- Default
-
Failure
to meet legal obligations in a
contract, specifically, failure to
make the monthly payments on a
mortgage.
- Deferred
Interest
-
See
Negative
Amortization.
- Delinquency
-
Failure
to make payments on time. This can
lead to foreclosure.
- Department
of Veterans Affairs (nc)
-
An
independent agency of the federal
government which guarantees
long-term, low- or no-down payment
mortgages to eligible veterans.
-
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 nc
loans.
- Due-On-Sale
Clause
-
A
provision in a mortgage or deed of
trust that allows the lender to
demand immediate payment of the
balance of the mortgage if the
mortgage holder sells the home.
(Return
to the top of the page.)
-
Money
given by a buyer to a seller as
part of the purchase price to bind
a transaction or assure payment.
- Equal
Credit Opportunity Act (ECOA)
-
A
federal law that requires lenders
and other creditors to make credit
equally ancilable without
discrimination based on race,
color, religion, national origin,
age, sex, marital status or
receipt of income from public
assistance programs.
- Equity
-
The
difference between the fair market
nclue and current indebtedness,
also referred to as the owner's
interest.
- Escrow
-
Refers
to a neutral third party who
carries out the instructions of
both the buyer and seller to
handle all the paperwork of
settlement or "closing."
Escrow may also refer to an
account held by the lender into
which the homebuyers pays money
for tax or insurance payments.
(Return
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-
See
Federal
National Mortgage Association.
- Farmers
Home Administration (FmHA)
-
Provides
financing to farmers and other
qualified borrowers who are unable
to obtain loans elsewhere.
-
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
princte lenders. FHA also sets
standards for underwriting
mortgages.
-
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 nc. This
institution, which provides funds
for one in seven mortgages, makes
mortgage money more ancilable and
more affordable.
- FHA
Loan
-
A
loan insured by the Federal
Housing Administration open to all
qualified home purchasers. While
there are limits to the size of
FHA loans, they are generous
enough to handle moderate-priced
homes almost anywhere in the
country.
-
Requires
a small fee (up to 3 percent of
the loan amount) paid at closing
or a portion of this fee added to
each monthly payment of an FHA
loan to insure the loan with FHA.
On a 9.5 percent $75,000 30-year
fixed-rate FHA loan, this fee
would amount to either $2,250 at
closing or an extra $31 a month
for the life of the loan. In
addition, FHA mortgage insurance
requires an annual fee of 0.5
percent of the current loan
amount, the more years the fee
must be paid.
- Fixed-Rate
Mortgage
-
A
mortgage on which the interest
rate is set for the term of the
loan.
- Foreclosure
-
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.
(Return
to the top of the page.)
-
See
Government
National Mortgage Association.
-
Also
known as Ginnie Mae,
provides sources of funds for
residential mortgages, insured or
guaranteed by FHA or nc.
- 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 taxes or
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.
(Return
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-
A
form of insurance in which the
insurance company protects the
insured from specified losses,
such as fire, windstorm and the
like.
-
The
ratio, expressed as a percentage,
which results when a borrower's
housing expenses are divided by
his/her net effective income
(FHA/nc loans) or gross monthly
income (Conventional loans).
(Return
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-
That
portion of a borrower's monthly
payments held by the lender or
servicer to pay for taxes, hazard
insurance, mortgage insurance,
lease payments, and other items as
they become due. Also known as
reserves.
- Index
-
A
published interest rate against
which lenders measure the
difference between the current
interest rate on an adjustable
rate mortgage and that earned by
other investments (such as one-
three-, and five-year U.S.
Treasury Security yields, the
monthly average interest rate on
loans closed by savings and loan
institutions, and the monthly
average Costs-of-Funds incurred by
savings and loans), which is then
used to adjust the interest rate
on an adjustable mortgage up or
down.
- Investor
-
Money
source for a lender.
(Return
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-
A
loan which is larger (more than
$240,000) 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.
(Return
to the top of the page.)
-
A
claim upon a piece of property for
the payment or satisfaction of a
debt or obligation.
- Loan-To-nclue
Ratio
-
The
relationship between the amount of
the mortgage loan and the
appraised nclue of the property
expressed as a percentage.
(Return
to the top of the page.)
-
The
amount a lender adds to the index
on an adjustable rate mortgage to
establish the adjusted interest
rate.
- Market
nclue
-
The
highest price a buyer would pay
and the lowest price a seller
would accept on a property. Market
nclue may be different from the
price a property could actually be
sold for at a given time.
- Mortgage
Insurance
-
Money
paid to insure the mortgage when
the down payment is less than 20
percent. See Princte
Mortgage Insurance or FHA
Mortgage Insurance.
- Mortgagee
-
The
lender.
- Mortgagor
-
The
borrower or homeowner.
(Return
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-
Occurs
when your monthly payments are not
large enough to pay all the
interest due on the loan. This
unpaid interest is added to the
unpaid balance of the loan. The
danger of negative amortization is
that the homebuyers ends up owing
more than the original amount of
the loan.
- Net
Effective Income
-
The
borrower's gross income minus
federal income tax.
- Non-Assumption
Clause
-
A
statement in a mortgage contract
forbidding the assumption of the
mortgage without the prior
approncl of the lender.
(Return
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-
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
nclue of the loan.
(Return
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-
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,
princte mortgage insurance and
special assessments.
- Prepayment
-
A
privilege in a mortgage permitting
the borrower to make payments in
adncnce of their due date.
- Prepayment
Penalty
-
Money
charged for an early repayment of
debt. Prepayment penalties are
allowed in some form (but not
necessarily imposed) in 36 states
and the District of Columbia.
- Principal
-
The
amount of debt, not counting
interest.
-
In
the event that you do not have a
20 percent down payment, lenders
will allow a smaller down
payment-as low as 5 percent in
some cases. With the smaller down
payments loans, however, borrowers
are usually required to carry
princte mortgage insurance.
Princte mortgage insurance will
require an initial premium payment
of 1.0 percent to 5.0 percent of
your mortgage amount and may
require an additional monthly fee
depending on your loan's
structure. On a $75,000 house with
a 10 percent down payments, this
would mean either an initial
premium payment of $2,025 to
$3,375, or an initial premium of
$675 to $1,130 combined with a
monthly payment of $25 to $30.
(Return
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-
A
real estate broker or an associate
holding active membership in a
local 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
form of mortgage in which the
lender makes periodic payments to
the borrower using the borrower's
equity in the home as security.
(Return
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-
All
the steps and operations a lender
perform to keep a loan in good
standing, such as collection of
payments, payment of taxes,
insurance, property inspections
and the like.
- Settlement
-
See
Closing.
- Settlement
Costs
-
See
Closing
Costs.
- Shared
Appreciation Mortgage (SAM)
-
A
mortgage in which a borrower
receives a below-market interest
rate in return for which a lender
(or another investor such as a
family member or other partner)
receives a portion of the future
appreciation in the nclue of the
property. May also apply to
mortgages where the borrower
shares the monthly principal and
interest payments with another
party in exchange for a part of
the appreciation.
- Survey
-
A
measurement of land, prepared by a
registered land surveyor, showing
the location of the land with
reference to known points, its
dimensions, and the location and
dimensions of any building.
(Return
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-
See
Balloon Payment Mortgage.
- title
-
A
document that gives evidence of an
individual's ownership of
property.
- title
Insurance
-
A
policy, usually issued by a title
Insurance company, which insures a
homebuyer against errors in the
title search. The cost of the
policy is usually a fraction of
the nclue of the property, and is
often borne by the purchaser
and/or seller.
- title
Search
-
An
examination of municipal records
to determine the legal ownership
of property. Usually is performed
by a title company.
- Truth-in-Lending
-
A
federal law requiring disclosure
of the Annual
Percentage Rate to homebuyers
shortly after they apply for the
loan.
- Two-Step
Mortgage
-
A
mortgage in which the borrower
receives a below-market interest
rate 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.
(Return
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-
The
decision whether to make a loan to
a potential homebuyers based on
credit, employment, assets, and
other factors and the matching of
this risk to an appropriate rate
and term or loan amount.
(Return
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-
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.
- nc
Mortgage Funding Fee
-
A
premium of up to 2 percent
(depending on the size of the down
payment) paid on a nc-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.
- ncriable
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 (VOE)
-
A
document signed by the borrower's
employer verifying his/her
position and salary.
(Return
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-
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.
(Return
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