Shopping for a mortgage? If you are one
of the tens of thousands of today's
shoppers, you probably have discovered
that mortgage lending has a language all
its own. For example, you've probably
heard about "points", "margins", and
"prepayment 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.
ACCELERATION CLAUSE - 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 your loan.
ADJUSTABLE RATE MORTGAGE (arm) - is a mortgage in
which the interest rate is adjusted periodically based on a preselected
index. Also sometimes known as the renegotiable rate mortgage, the
variable rate mortgage or the Canadian rollover mortgage.
ADJUSTMENT INTERVAL - 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.
ANNUAL PERCENTAGE RATE (APR) - 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 value of property,
made by a qualified professional call 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 charges will
BALLOON (PAYMENT) MORTGAGE - usually a short-term
fixed rate loan which involved 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.
BUY-DOWN - when the lender and/or the homebuilder
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.
CAPS (INTEREST) - consumer safeguards which limit
the amount the interest rate on an adjustable rate mortgage may change
per year and/or over the life of the loan.
CAPS (PAYMENT) - consumer safeguards which limit
the amount monthly payments on an adjustable rate mortgage may change.
CLOSING - the meeting between the buyer, seller and
lender or their agents where the property and funds legally change
hands. Also called settlement.
CLOSING COSTS - 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 advances fund to the
builder at periodic intervals as the work progresses.
CONVENTIONAL LOAN - a mortgage not insured by FHA
or guaranteed by the VA or Farmers Home Administration (FMHA).
CREDIT REPORT - a report documenting the credit history
and current status of a borrower's credit standing.
DEBT-TO-INCOME 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/VA
loans) or gross monthly income (conventional loans). See housing expenses-to-income
DEED OF TRUST - 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
DEFERRED INTEREST - see negative amortization.
DELINQUENCY - failure to make payments on time. This
can lead to foreclosure.
DEPARTMENT OF VETERANS AFFAIRS (VA) - an independent
agency of the federal government which guarantees long-term, low-
or no-downpayment mortgages to eligible veterans.
DISCOUNT POINT - see points.
DOWNPAYMENT - money paid to make up the difference
between the purchase price and the mortgage amount. Downpayments 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 VA 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.
EARNEST MONEY - 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) - is a federal
law that requires lenders and other creditors to make credit equally
available without discrimination based on race, color, religion, national
origin, age, sex, marital status or receipt of income from public
EQUITY - the difference between the fair market value
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 homebuyer pays money for
tax or insurance payments.
FANNIE MAE - see Federal National Mortgage Association.
FARMERS HOME ADMINISTRATION (FmHA) - provides financing
to farmers and other qualified borrowers who are unable to obtain
FEDERAL HOME LOAN BANK BOARD (FHLBB) - a regulatory
and supervisory agency for federally chartered savings institutions.
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) -
also called "Freddie Mac," is a quasi-governmental agency that purchases
conventional mortgages from insured depository institutions and HUD-approved
FEDERAL HOUSING ADMINISTRATION (FHA) - a division
of the Department of Housing and Urban Development. Its main activity
is insuring of residential mortgage loans made by private lenders.
FHA also sets standards for underwriting mortgages.
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) - 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 VA. This institution, which
provided funds for one in seven mortgages, makes mortgage money more
available and more affordable.
FHA LOAN - a loan insured by the Federal Housing
Administration open to all qualified home purchasers. While there
a limits to the size of FHA loans ($155,250 as of 1/1/96), they are
generous enough to handle moderate priced homes almost anywhere in
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 the defaulting borrower's
FREDDIE MAC - see Federal Home Loan Mortgage.
GINNIE MAE - see Government National Mortgage Association.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) -
also known as "Ginnie Mae," provides sources of funds for residential
mortgages, insured or guaranteed by FHA or VA.
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 expenses are deducted.
GUARANTY - 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.
HAZARD INSURANCE - a form of insurance in which the
insurance company protects the insured from specified losses, such
as fire, windstorm and the like.
HOUSING EXPENSES-TO-INCOME RATIO - the ratio, expressed
as a percentage, which results when a borrower's housing expenses
and divided by his/her net effective income (FHA/VA loans) or gross
monthly income (conventional loans). See debt-to-income ratio.
IMPOUND - that portion of a borrower's monthly payments
held by the lender or servicer to pay for taxes, hazard insurance,
mortgage insurance, lease payment, 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 - a money source for a lender.
JUMBO LOAN - a loan which is larger (more than $207,000
as of 1/1/96) 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.
LIEN - a claim upon a piece of property for the payment
or satisfaction of a debt or obligation.
LONA-TO-VALUE RATIO - the relationship between the
amount of the mortgage loan and the appraised value of the property
expressed as a percentage.
MARGIN - the amount a lender adds to the index on
an adjustable rate mortgage to establish the adjusted interest rate.
MARKET VALUE - the highest price that a buyer would
pay and the lowest price a seller would accept on a property. Market
value 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 downpayment is less than 20 percent. See private mortgage
insurance, FHA mortgage insurance.
MORTGAGEE - the lender.
MORTGAGOR - the borrower or homeowner.
NEGATIVE AMORTIZATION - 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 homebuyer ends up owing
more than the original amount of the loan.
NET EFFECTIVE INCOME - the borrower's gross income
minus federal income tax.
NONASSUMPTION CLAUSE - a statement in a mortgage
contract forbidding the assumption of the mortgage without the prior
approval of the lender.
ORIGINATION FEE - 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 the face
value of the loan.
PITI - principal, interest, taxes, and insurance.
Also called monthly housing expense.
POINTS (LOAN DISCOUNT POINTS) - 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
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, private mortgage insurance and special assessments.
PREPAYMENT - a privilege in a mortgage permitting
the borrower to make payments in advance 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,
left on a loan.
PRIVATE MORTGAGE INSURANCE (PMI) - in the event that
you do not have a 20 percent downpayment, lenders will allow a smaller
downpayment - a low as 5 percent in some cases. With the smaller downpayment,
however, borrowers are usually required to carry private mortgage
insurance. Private 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 downpayment, 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
REALTOR - a real estate broker or an associate holding
active membership in a local real estate board affiliated with the
National Board 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.
RESPA - short for the Real Estate Settlement Procedures
Act. 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
the 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.
SERVICING - all the steps and operations a lender
performs to keep a loan in good standing, such as collection of payments,
payment of taxes, insurance, property inspections, and the like.
SETTLEMENT/SETTLEMENT COSTS - See closing/closing
SHARED APPRECIATION MORTGAGE (SAM) - a mortgage in
which a borrower receives a below-market interest rate in return for
which the lender (or another investor such as a family member or other
partner) receives a portion of the future appreciation in the value
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
TERM MORTGAGE - see balloon payment mortgage.
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 function of the
value of the property, and is often borne by the purchaser and/or
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 ten), 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 with 30 days notice
at the end of seven or ten years. Also called Super Seven or Premier
UNDERWRITING - the decision whether to make a loan
to a potential homebuyer based on credit, employment, assets, and
other factors and the matching of this risk to an appropriate rate
and term or loan amount.
VA LOAN - a long-term, low-, or no-downpayment loan
guaranteed by the Department of Veterans Affairs. Restricted to individuals
qualified by military service or other entitlements.
VA MORTGAGE FUNDING FEE - a premium of up to 1 7/8
percent (depending on the size of the downpayment) paid on a VA-backed
loan. On a $75,000 30-year fixed-rate mortgage with no downpayment,
this would amount to $1,406 either paid at closing or added to the
VARIABLE RATE MORTGAGE (VRM) - see adjustable rate
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.
WRAPAROUND - 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.
source: Mortgage Bankers Association.
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