Mortgage Glossary - Financial Terms
A
Accrued Interest: Interest earned
but has not been paid
Additional Principal Payment: A payment
made by the borrower of more than the scheduled principal
amount due with the purpose of reducing the remaining
balance on the loan.
Adjustable Rate Mortgage: Loans with
interest rates that are adjusted periodically based
on changes of a pre-determined index. The index is based
on market rates such as Treasury bills and prime rates.
The ARM has an interest rate cap that limits the amount
the interest rate can change.
Adjustment Period: Applicable to an
ARM, the time between changes in the interest rate.
Amortization: Repayment of a debt
with periodic payments, usually monthly, of principal
and interest calculated to pay down the loan within
a predetermined time.
Amortization Schedule: A timetable
for payment of a mortgage detailing the amount of each
payment applied to interest and principal and the balance
left outstanding.
Annual Percentage Rate (APR): The
cost of credit shown as a yearly rate. The annual percentage
rate is usually not the same as the interest rate. The
APR will be higher than the interest rate stated in
the note due to the fact that it includes the interest
rate, loan discount points, fees and mortgage insurance.
Appraisal Fee: A fee charged by a
licensed, certified appraiser for a written estimate
of a property's current market value at a specific time.
Assumable Mortgage: A mortgage that
can be taken over by the buyer when a home is sold by
the previous owner.
B
Bankruptcy: A legal procedure in a
federal court to relieve certain debts of a person or
a business that is no longer able to pay its debts.
Chapter 7 bankruptcy removes all debts. Chapter 13 lets
a borrower with and income to pay bills off over a set
period of time.
Bearer: The legal owner of a property.
Bill of Sale: A document that details
the transfer of property.
Biweekly Mortgage: A mortgage with
payments due every two weeks, totaling 26 payments a
year, two payments more than a mortgage with monthly
payments. The two extra payments lowers significantly
the interest paid over the life of the mortgage.
Blanket Mortgage: A mortgage that
includes more than one piece of real estate
Borrower (Mortgager): An individual
who makes an application for and receives funds in the
form of a loan and is obligated to repay the loan in
full under the conditions of the loan.
Broker: An individual who gets buyers
and sellers together and helps in negotiating contracts
for a client.
Buy-Down Mortgage: A mortgage loan
with a lower than market rate for a determined period
of time.
Buyer’s Market: Market conditions
that favor buyers. When there are more properties for
sale than buyers, sellers may be forced to provide price
discounts to close the transaction.
C
Cash To Close: Liquid assets that
are available on hand for payment of closing costs involved
in the processing of a mortgage transaction.
Closing: The completion of a real
estate transaction. The closing includes the delivery
of a deed, financial adjustments, signing of notes and
disbursement of funds required to finalize the sale
and loan transaction.
Closing Costs: Fees generally paid
by the borrower in relation to the closing of a mortgage
loan.
Collateral: Property pledged as security
for a debt.
Conforming Loan: Conventional home
mortgages eligible for sale and delivery to either the
Federal National Mortgage Association (FNMA) or the
Federal Home Loan Mortgage Corporation (FHLMC). These
agencies generally buys first mortgages up to loan amounts
approved by Congressional directive.
Conventional Loan: Loans that are
not part of any government housing program, free of
any restrictions of government insured housing programs,
such as loan size limits.
Conversion Clause: A feature in certain
ARMs that gives you the option to convert the variable
rate loan to a fixed-rate loan, usually after the first
adjustment period. The new fixed rate will be set at
current rates and there could be a fee for the conversion
feature.
Convertible ARM: A type of ARM loan
that can be converted to a fixed-rate loan after a certain
time period.
Covenant: A clause in a contract that
obligates or restricts the parties and if broken, can
result in a legal action.
Credit Bureau: It is a clearinghouse
for credit history information.
Credit Report: A report containing
a detailed credit history of an individual.
D
Default: Failure to fulfill legal
obligations of a contract, including failure to make
payments on a loan.
Discounted Loan: When the note rate
on a loan is lower than the market rate, it is a discounted
loan.
Discount Point: A point paid to the
lender to permanently lower or acquire down an interest
rate. Money must be paid up front to lower the rate.
Down Payment: The amount of cash you
must pay down initially for the purchase of your home.
For conventional loans, you should aim for a down payment
that's at least 20% of your home's value. The reason
is lenders generally do not require private mortgage
insurance with a down payment of at least 20% of your
home's purchase price.
E
Equity: The difference between the
current market value of a property and the total debt
outstanding against the property.
Escrow: A transaction in which a third
party represents both the buyer and seller, or for borrower
and lender, involving the handling of legal documents
and disbursement of funds. In some parts of the US,
escrow of taxes and insurance premiums are referred
to as impound or reserves.
F
Federal Home Loan Mortgage Corporation (FHLMC
or Freddie Mac): A semi government agency that
acquires conventional loans that are underwritten to
its specific guidelines. These guidelines are an industry
standard for residential conventional lending.
Federal Housing Administration (FHA):
A federal agency within the Department of Housing and
Urban Development (HUD), which insures residential mortgage
loans made by private lenders and sets standards for
underwriting mortgage loans.
Federal National Mortgage Association (FNMA
or Fannie Mae): This agency purchases loans
that are underwritten to its specific guidelines. These
guidelines are an industry standard for residential
conventional lending.
FHA Loans: Fixed or adjustable-rate
loans that are insured by the U.S. Department of Housing
and Urban Development. The purpose of FHA loans is to
make housing more affordable, especially for first-time
homebuyers.
First Mortgage: A mortgage which is
in first lien, taking priority over all other liens.
In case of a foreclosure, the first mortgage will be
repaid before any other mortgages.
Fixed Rate Loan: Fixed-rate loans
have interest rates and payments that are fixed through
out the term of the loan.
Foreclosure: A legal process in which
a mortgaged property may be liquidated to pay off a
mortgage loan that is in default.
G
Good Faith Estimate: A written estimate
of the closing costs the borrower will most likely have
to pay based on common local practices. Under the Real
Estate Settlement Procedures Act (RESPA), the lender
is must provide this disclosure to the borrower within
three days of receiving a loan application.
H
Home Equity Line of Credit: A type
of revolving credit in which your home is used as collateral.
Home Equity Loan: A revolving line
of credit or loan based on the equity in the mortgagor's
property. The property is the collateral for the loan,
which is usable for any purpose.
Housing and Urban Development (HUD): A
U.S. government agency created to introduce federal
housing and community development programs; manages
the Federal Housing Administration.
I
Index: An index is usually a widely
published market rate such as LIBOR, T-Bill or 11th
District Cost of Funds (COFI). Lenders use these indices
to set the interest rates charged on mortgage loans.
For ARM, a predetermined margin is added to the index
to calculate the interest rate adjustment.
Initial Rate: The rate charged for
the first interval of an ARM loan.
Interest: Compensation in the form
of money paid for the use of money.
Interest Rate Cap: Caps limit the
range that the interest rate on an adjustable rate mortgage
can change in an adjustment interval during the term
of the loan.
J
Jumbo Loan: A mortgage over the $300,700
limit established by the Federal National Mortgage Association
and the Federal Home Loan Mortgage Corporation. A jumbo
mortgage tend to carry a higher interest rate than a
conventional mortgage.
Junior Mortgage: A mortgage subordinate
to the claim of a prior lien or mortgage. In the case
of a foreclosure, a senior mortgage or lien will be
paid down first.
L
Lender: The bank, mortgage company
or mortgage broker providing the loan.
Loan Application: A statement of personal
and financial information needed to apply for a loan.
Loan Application Fee: A fee applied
by a lender to cover the initial costs of putting through
a loan application. The fee could include the cost of
getting a property appraisal, a credit report and a
lock-in fee and other closing costs incurred to complete
the transaction.
Loan Origination Fee: Fee charged
by a lender for the administrative costs of processing
a loan.
Loan to Value Ratio (LTV): The balance
of the mortgage outstanding as a percentage of the home's
price.
Lock or Lock In: A lender's guarantee
of an interest rate for a specific period of time. The
time period is usually between the loan application
approval and loan closing. The borrower wants the lock
to stay in effect until closing.
M
Margin: The percentage difference
between the index for a specific loan and the interest
rate charged. This is a number already set by the lender.
Market Value: The price at which a
given property or product is transacted between a willing,
unhurried buyer and a seller who know all the pertinent
facts about the property.
Mortgage Banker: A financial institution
who directly funds home loans, sells them to investors,
arranges monthly payments and handles escrow. Some mortgage
bankers sell their loans on the secondary market.
Mortgage Broker: A broker arranges
financing for borrowers with a variety of lenders. A
mortgage broker does not make the loan, but receives
payments for its services.
Mortgage Insurance: It is insurance
to protect the lender in case you default on your loan.
With conventional loans, mortgage insurance is generally
not required if you make a down payment of at least
20% of the home's appraised value. It is also known
as PMI (Private Mortgage Insurance).
Mortgage Loan: A loan for which a
specific real estate property serves as collateral to
provide for repayment in case of default.
Mortgage Refinance: A refinanced mortgage
is one in which a borrower pays down an old loan with
a new loan. People who refinance a mortgage tend do
so to get a lower interest rate, lowering their payments
or to take cash out of their home equity.
Mortgagee: The lender in a mortgage
loan relationship. Property is used as collateral to
make payment.
Mortgagor: The borrower in a mortgage
loan relationship. Property is used as collateral to
make payment.
N
Notice of Default: A step in the foreclosure
process in which the lender formally informs the court
that the borrower is in late in payments.
Non-Assumption Clause: A provision
in a mortgage contract preventing the assumption of
the mortgage by another borrower without the lenders
permission.
O
Origination Fee: Fee charged by a
lender for administrative costs of processing a loan.
It tends to includes the cost of preparing loan documents,
checking the borrower's credit history, inspecting the
property and might incorporate the cost of appraisal.
P
Payment Cap: A limit on the size of
the monthly payment of an adjustable-rate mortgage or
other variable rate loan.
Point: A point is equivalent to 1
percent of a mortgage loan. Lenders might charge "origination
points" to cover expenses of processing a loan.
Some borrowers might pay "discount points"
to reduce the loan's interest rate.
Pre-Approval: The process of calculating
how much money a potential homebuyer could borrow.
Prepayment Penalty: A lender's charge
to the borrower for paying down the loan before the
end of its term.
Pre-Qualification: A non-binding process
of calculating how much money a potential homebuyer
can borrow before applying for a loan. Information submitted
during pre-qualification is subject to verification
at application.
Principal: It is the amount of money
borrowed or owed, excluding interest.
R
Refinancing: The repaying of a debt
with the proceeds from a new loan using the same property
as collateral. The reason for refinancing is to get
a lower interest rate.
S
Second Mortgage: An additional mortgage
that has rights that are secondary to the first mortgage.
Seller’s Market: Market conditions
that are favorable to sellers. There are more buyers
than properties available for sale. The buyers may be
forced to compete and pay more for the same property.
Settlement Costs: Money paid by the
borrowers and sellers to complete the closing of a mortgage.
Settlement Cost (HUD Guide): HUD publishes
a booklet that gives an overview of the lending process
and is given to consumers after completing their loan
application.
T
Term: The period of time in which
a loan must be paid off.
Truth-In-Lending Act: Federal law
demanding a full written disclosure of the credit terms
of a mortgage incorporating a standard format.
U
Underwriting: It is the process of
quantifying the risks involved in a specific loan and
setting suitable terms and conditions for a mortgage.
URLA: Uniform residential loan application.
Usury: Interest charged in excess
of the legal rate as established by law.
V
VA Loans: Fixed-rate loans guaranteed
by the U.S. Department of Veterans Affairs for the purpose
of making housing affordable to eligible U.S. veterans.
Variable Rate: Interest rate that
changes periodically in relation to a specific index
such as treasury bills and the prime rate.
W
Walk Through: A final inspection of
a home to look for problems that may need to be addressed
before closing.
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