lossary of Terms

2/1 buy Down Mortgage - A type of loan that helps borrowers borrow more than they'd normally qualify for. They begin the process by qualifying for mortgage rates that are below the market rate. At the end of the loan's first year, the interest rate experiences a 1% increase. Then after 12 more months, the interest rate undergoes another 1% adjustment. From that point forward, the interest rate on the loan remains fixed. Refinancing after 24 months is one way to ensure that borrowers get the most favorable rate of interest for the loan term, however, this is not always necessary.
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Acceleration Clause - A way for the lender to demand full payment of the principal loan amout. This mortgage provision can be executed by the lender in the event that a monthly payment is not made as agreed or the borrower in some other way defaults on the loan.
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Additional Principal Payment - The amount paid over and above the minimum principal amount due. Borrowers often make additional principal payments as a way to more quickly reduce the mortgage balance.
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Adjustable-Rate Mortgage (ARM) - A type of mortgage in which the interest rate fluctuates up and/or down during the loan term. Interest rates on ARMs move in accordance with an Index Rate. Also known as VRMs (Variable Rate Mortgages) or AMLs (Adjustable Mortgage Loans).
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Adjusted Basis - A property's adjusted cost after adding to it the dollar value of improvements made to the property minus the amount calculated for depreciation.
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Adjustment Date - Applies to a ARMs (Adjustable Rate Mortgages) and is the date on which the ARM's rate of interest increases or decreases.
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Adjustment Period - Applies to a ARMs (Adjustable Rate Mortgages) and pertains to the period of time between changes to the interest rate.
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Affordability Analysis - A study undertaken on a buyer which attempts to determine if a prospective home buyer is able to afford such a purchase. The study considers such factors as the buyer's income, buyer's liabilities, buyer's sources of funding, buyer's preferred mortgage type and anticipated closing costs, and the geographical area in which the buyer wants to purchase the home.
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Amortization - The re-payment of a mortgage loan (including both principal and interest amounts) according to an installment schedule.
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Amortization Term - The amount of time a borrower has to repay a mortgage in full. For example, the amortization term for a 30-year morgage is 30 years or 360 months. For a 15-year mortgage, the term is 15 years or 180 months.
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Annual Percentage Rate (APR) - This figure is almost always confused with the interest rate, but it is very different. The APR is actually the cost to the buyer of credit and is a combination of the additional costs that are often associated with a mortgage including points, premiums for mortgage insurance, prepaid mortgage interest, and origination fees. The APR is calculated on a yearly basis and will almost always be higher than the interest rate, but it reflects a truer cost of a mortgage as required by Federal Law. This rate is the one to use when comparing loans from different lenders.
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Appraisal - Generally performed by a professional Appraiser, this is a written report that determes the value of a home based on its size, condition, features, and comparable market sales. It's something most lenders will require before approving a mortgage.
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Appraised Value - A figure that is determined upon completion of the appraisal process. Appraised Value is a subjective figure based on a combination of the appraiser's written report, their knowledge, and their experience.
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Asset - Anything that a person owns that also has a monetary value. Real and personal property, stocks and bonds, mutual funds and bank account balances are examples of assets.
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Assignment - A term to describe when transferring a mortgage from Person A to Person B.
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Assumability - Some mortgages allow transferability from home seller to buyer. Before lenders approve such a mortgage transfer, the buyer must undergo a full credit review. There often is a charge associated with this type of mortgage transfer. Prospective buyers cannot assume a mortgage that includes a "due on sale" provision.
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Assumption Fee - The amount that a buyer of property pays to the lender when the buyer assumes the mortgage of the seller.
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Balance Sheet - A basic Accounting document that is used to specify the liabilities, assets, and resulting net worth of an individual on a particular date.
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Balloon Mortgage - A type of mortgage in which the borrower is required to make smaller, amortized monthly payments for a specified period of time, and then one, typically large, final lump payment is required based on a pre-negotiated payment schedule.
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Baloon Payment - This is the final amount paid on the date that a Balloon Mortgage matures.
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Before Tax Income - A person's income before any state, Federal or other taxes are taken out.
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Biweekly Payment Mortgage - A way to reduce the amount of interest paid over the life of a mortgage, by more frequently reducing the principal. Instead of making one mortgage payment every month, a borrower makes a mortgage payment equal to half of the monthly amount every other week, resulting in 26 or 27 mortgage payments per year, instead of the normal 12.
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Bridge Loan - This is a type of loan that generally is short term and generally has a high rate of interest. It's used by buyers as a way to secure the financing necessary to purchase another home while the buyer awaits the sale of an existing home. The existing home is typically used as collateral. The term "swing loan" is also used when describing this type of loan.
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Broker - A company or an individual whose purpose is to match up the financing needs of home buyers with suitable lenders.
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Buydown - A single cash payment made by or on behalf of a borrower at or near the loan origination made for the purpose of reducing the amount of future monthly payments. Applicable to either fixed or adjustable rate loans.
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Cap - Defines the highest amount by which an interest rate, or a monthly payment can increase. Can pertain to either the life of the loan or to an adjustment period.
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Certificate of Eligibility - Issued to veterans by a branch of the Federal government as proof that a veteran meets the eligibility requirements of a VA loan (a loan that is issued by the the Department of Veterans Affairs).
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Certificate of Reasonable Value (CRV) - A document that defines the maximum amount of a loan and the maximum value of a loan as determined by the Department of Veterans Affairs (VA). Document also originates with the VA.
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Change Frequency - Defines how often the interest rate and/or payments of an Adjustable Rate Mortgage occurs. Generally stated in months.
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Closing - The final step in the home buying/selling process. A meeting among all parties during which the sale of a home is made final. Mortgage documents are signed and witnessed and all closing costs are paid.
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Closing Costs - Refers to all of the additional costs that are involved with the purchase and sale of a property. These costs are incurred by both buyers and sellers and include such expenses as costs of escrow, appraisal fees, property taxes, notary fees, document preparation fees, recording fees, title insurance fees, legal fees and others. The amount and the type of fees charged at closing vary depending on the state in which the sale occurred and depending on the lender involved.
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Compound Interest - Interest that is calculated on the unpaid interest, the accrued interest, and the initial amount of principal.
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Consumer Reporting Agency or Bureau - Works to put together the necessary reports and other documentation which pertain to a person's history of credit usage. Lenders then use this information to assist in determining mortgage eligibility. These resports and documents originate from a number of different sources.
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Conversion Clause - A section often included in an Adjustable Rate Mortgage (generally for an additional fee) that gives the mortgage holder the opportunity to convert this type of mortgage into a fixed rate type of mortgage at a prenegotiated date, which typically follows the initial adjustment period.
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Credit Report - A detailed account of a person's on-going use of credit, previous addresses, previous names, previous judgements or liens and other credit-related information prepared by one of the three major credit bureaus and used by lenders to help determine a mortgage applicant's ability to manage credit.
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Credit Risk Score - A score calculated off the information contained in a credit report that is used to measure a person's credit risk. The calculation uses a standard formula. The higher the score, the less credit risk and alternatively, the lower the score, the higher credit risk the person is believed to be. Factors that will lower your credit score include late credit card payments, abusive use of credit, and unresolved tax liens. The most commonly used score nowadays is the FICO score, which ranges from a low of 300 to a high of 850. It's important to not only know your score, but to also know what's negatively impacting your score so you can take steps to correct these issues. These scores are one of the elements reviewed by most any underwriting department.
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Deed of Trust - With this type of document, which used in some of the states, conveyance of the title is to a Trustee instead of to the borrower as with a mortgage.
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Default - When a monthly mortgage payment is not made according to schedule, or when some other term of a mortgage is not adhered to.
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Delinquincy - The term used when a mortgage payment is not made according to schedule.
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Deposit - An amount of money that typically is given in advance along with a contract for sale and is generally held in escrow. It's given as a way to show a buyer's commitment and intention to complete the purchase of a home.
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Discount - This applies to ARMs with initial rate discounts. It's a way for a lender to lower the monthly payments for a not more than a year by giving up percentage points in interest which will in turn lower the rate. However beyond that discount period, the ARM will generally increase by an amount based on the index rate.
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Down Payment - The portion of a home's selling price that is paid using cash, which reduces the amount that the buyer needs to finance.
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Effictive Gross Income - A borrower's regular annual salary plus any other source of income that is considered to be a significant amount, stable, and on-going such as overtime.
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Equity - A figure that is based on a home's current worth as determined by an analysis of the comparable market minus the amount of money (number of mortgage payments) that is still owed on the home.
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Escrow - An item such as a down payment, or document that is held by a neutral party (sometimes referred to as an escrow agent) until such time that certain conditions have been fulfilled. In real estate, cash deposits are generally held in escrow until closing where they are then applied towards the closing costs.
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Escrow Disbursements - Many monthly mortgages include amounts to cover the costs of month property taxe and homeowner's insurance payments. Funds to cover these espenses are held in escrow and as each payment is due, a portion of the escrowed funds are released, or disbursed.
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Escrow Payment - The portion of funds being held by the mortgage servicer that are disbursed when payments for property tax, homeowner's insurance or mortgage insurance are due.
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Fannie Mae - The Federal National Mortgage Association that offers assistance in the form of programs and financing to low, moderate and middle income home buyers.
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FHA Mortgage - A government mortgage insured by a branch of the federal government known as the Federal Housing Administration (FHA).
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FICO Score - A credit score that is calculated based on a standardized mathematical formula. FICO scores range from a low of 300 to a high of 850 and are used as a way to help determine an individual's creditworthiness. Credit scores are heavily relied on by mortgage underwriting departments. A higher score will usually translate to more favorable terms when applying for a mortgage.
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First Mortgage - The main lien against a piece of property and, should a default occur, is the mortgage entitled to make a first claim.
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Fixed Installment - The amount of the monthly mortgage payment that includes both principal and interest.
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Fixed-Rate Mortgage (FRM) - A type of mortgage that has a non-changeable, or fixed, interest rate that is applicable for the entire loan term.
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Fully Amortized ARM - The monthly mortgage payment on an ARM that is set precisely so that over the term of amortization, and taking into account the rate of interest accrual, the balance that remains can be fully amortized.
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GNMA - Know also as Ginnie Mae, this is a corporation that is owned by the federal government and that now has the responsiblity of administering a special assistance loan program that had been formerly run by Fannie Mae.
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Growing-Equity Mortgage (GEM) - A type of mortgage in which the amount of the monthly mortgage payments increase over a specified period and where the amount by which the payments are increased is used as a way to reduce this fixed rate loan balance.
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Guarantee Mortgage - A third party assumes responsiblity for guaranteeing this type of mortgage.
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Housing Expense Ratio - Figures which indicate the percentage of an individual's gross income each month that can be put towards the expenses related to housing.
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HUD-1 Statement - Lists every one of the costs that are payable by both buyer and seller at the time of closing. Examples of the costs and their associated standardized code that appear on this statement include loan points and other fees, monies held in escrow, commissions, home inspection fees, and many others. The costs are separtated into columns based on the party responsible for paying the particular fee. The bottom line of each column indicates the amount the buyer has to pay to cover their portion of the fees and the amount that the seller is entitled to after their share of the fees are reduced from the sale.
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Hybrid ARM - Like a rose, there are several variations of an ARM ioncluding 3/1, 5/1 and 7/1. This type of mortgage appeals to buyers who plan to move within a few years or plan to refinance before the adjustable rate period commences. The 3/1 loan for example, offers a fixed interest rate for the first 3 years and then converts to an adjustable interest rate (at the then prevaling rate) for the balance of the term.
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Index - This is a number or it is sometimes a percentage that is based on yields or on the average of interest rates over a period of time that lenders use to help determine the amount by which an ARM's interest rate will change over a specified period of time.
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Initial Interest Rate - This is the loan's interest rate on the day of closing. This rate is also called a teaser rate or a starter rate. The initial interest rate will change on an ARM.
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Installment - This is another term for the periodic mortgage payment that the borrower has agreed to pay to the lending institution.
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Insured Mortgage - A mortgage that has the backing or the protection of private mortgage insurance (PMI) or that is backed by the federal government, and specifically, the FHA.
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Interest - The fee that one who borrowers money pays for the privilege of being able to borrow the money from a lender.
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Interest Accrual Rate - A rate of interest, typically defined as a percentage, by which interest on a mortgage accrues. Monthly mortgage payments are generally calculated using this rate.
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Interest Rate Buydown Plan - This plan has many variations, but basically the goal is to work out an arrangement for a borrower to pay an interest rate that below the market rate for the first few years of the mortgage. In exchange for the lower interest rate during the loan's early years, the borrower typically pays additional points.
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Interest Rate Ceiling - This is the highest rate by which the interest rate on an ARM is allowed to increase. This ceiling is defined in the note.
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Interest Rate Floor - This is the lowest rate by which the interest rate on an ARM is allowed to decrease. This floor is defined in the note.
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Late Charge - The fee that the lender is allowed to charge and that a borrower is required to pay whenever a mortgage payment is processed after the extended due date, which in most cases is 15 days after the actual due date.
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Lease-Purchase Mortgage Loan - A type of financing that allows an individual to lease a home and at the same time have the option to buy the home. This fincial arrangement helps individuals buy a house by taking a portion of the monthly lease payment and putting into a special savings account that will later be used for the down payment. The balance of the lease payment is put towards PITI on the home's first mortgage.
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Liabilities - Pertains typically to an individual's financial obligations and includes both short- and long-term debt.
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Lifetime Payment Cap - When present on an ARM, this defines the most that the mortgage interest rate is allowed to increase or decrease during the loan term. Also see definition for Cap.
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Line of Credit - An agreement made by a lending institution or a bank to extend a certain amount of credit for a certain period of time.
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Liquid Asset - An asset that can be turned into cash easily. Cash also is considered a liquid asset.
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Loan - A certain amount of money that is borrowed with the intention of repaying that amount (also called principal) plus interest.
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Loan-To-Value Percentage (LTV) - A way of determining the degree of risk the lender has in holding a mortgage on a piece of property. It's important should the borrower default on the loan which typically forces the lender to have to sell the property. The LTV is determined based on the property's fair market value and the balance of the mortgage.
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Lock-In Period - The period of time that a particular rate of interest has been guaranteed, or locked-in, by the lender primarily during the the loan approval period. Points on the loan and other loan terms can also be locked in during this period. The way the lock in period works varies among lenders with some lenders even charging a fee for this security.
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Margin - Lenders calculate the interest rate for each adjustment period of an ARM by adding percentage points to the index rate. The number of percentage points added is considered the margin.
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Maturity - Refers to a date that a debt is due. In the case of real estate, the maturity date refers to the day that a loan's principal balance is due and the date that it must be paid.
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Monthly Fixed Installment - Pertains to the amount of a borrower's mortgage payment that gets applied to the interest and the principal. The balance of a loan can actually increase in instances where a mortgage amortizes negatively meaning that no portion of the monthly payment goes towards reducing the principal, or it does not cover the full amount of the interest.
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Mortgage - A loan that is used by a buyer to help with the purchase of a home that typically includes interest and a loan repayment schedule. The mortgage is actually a legally-binding piece of paper that the lender keeps in its possession as collateral until the borrower satisfies all terms of this loan.
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Mortgage Banker - A business that creates loans with the sole intention of reselling them on the secondary market specializing in mortgages.
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Mortgage Insurance - Often required by a lender as a way of protecting itself in the event that a borrower defaults on a conventional or government mortgage loan. Mortgage insurance programs are available through private mortgage insurance companies and through the government.
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Mortgage Insurance Premium (MIP) - Mortgage insurance does have a cost which is typically paid by the borrower and MPI is the amount the borrower is required to pay for the insurance coverage.
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Mortgage Life Insurance - A term life type of insurance policy that will pay off the mortgage balance using the the proceeds from the insurance in the event of the death of a borrower.
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Mortgagor - The term used to indicate the party borrowing the money for the mortgage.
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Negative Amortization - The balance of a loan can actually increase in instances where a mortgage amortizes negatively meaning that no portion of the monthly payment goes towards reducing the principal, or it does not cover the full amount of the interest. The unpaid portions actually get added back onto the balance which over time can actually increase the mortgage balance. Individuals with ARMs sometimes find that payment caps can cause monthly payments to be too low to cover the amount of monthly interest, resulting in negative amortization.
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Net Worth - The total value of an individual's assets, including those assets in cash, after deducting the total of that individual's liabilities.
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Non Liquid Asset - Any type of asset that a person cannot convert to cash easily.
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Note - A legally binding document that outlines a borrower's obligation as it pertains to the repayment of a loan including the time period for repayment and the interest rate that was agreed to.
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Origination Fee - One of the many fees that will occur during the loan approval process, this fee, usually stated as a "point" which is equal to 1% of the amount of the mortgage loan, is what a lender charges for the work involved in processing an application for a loan.
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Owner Financing - With this type of financing, the home seller takes care of some portion of or all of the financing necessary for a buyer to purchase the home.
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Payment Change Date - Applicable to ARMs and some GPMs (Graduated Payment Mortgages), this is the date that the newly calculated (adjusted) mortgage payment will become effective. This date generally is set for the month after which a change in a payment amount is made.
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Periodic Payment Cap - During a ARMs adjustment period, this is the limit on how much a payment is allowed to decrease or increase.
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Periodic Rate Cap - During a ARMs adjustment period, this is the limit on how much an interest rate is allowed to decrease or increase, regardless of the index.
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PITI Reserves - An amount of actual cash the borrower is required to have available over and above the amounts necessary to cover the down payment and the closing costs. PITI is an abbrevition for principal, Interest, Taxes and Insurance, and generally, borrowers are required to have enough cash to cover a minimum of 3 months worth of PITI.
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Points - Another of the fees paid at closing either by the buyer or the seller or split between both parties. Points are stated most often as a single digit number, but in actuality they represent a percentage of the loan amount. So for example, 2 points actually translate to an amount equal to 2% of the amount of the mortgage. Points are charged by and paid to the lender.
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Prepayment Penalty - A provision in a mortgage that will trigger a penalty in the event that the borrower repays the mortgage in full before it is due. This can be a sizeable amount so if you're planning an early pay-off, be sure to check whether your mortgage contains this provision.
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Pre-Approval - A process prospective buyers undergo to see how much of a loan they can qualify for, so they know how much house they can afford to purchase.
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Prime Rate - Banks charge their better customers a different rate of interest and this different rate is the Prime Rate. When the Prime Rate changes, it also causes other types of interest rates to change such as those charged for mortgages.
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Principal - The part of the mortgage that is solely the amount that the person borrowed. This does not include the interest or any other fees associated with the loan.
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Principal Balance - The part of the mortgage that is solely the amount that the person borrowed and that remains unpaid. This does not include the interest or any other fees associated with the loan.
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PITI - PITI is an abbrevition for the words Principal, Interest, Taxes and Insurance which are commonly used together because they are the 4 basic parts of every mortgage. Principal is the part of the mortgage that is solely the amount that the person borrowed and that typically gets reduced each month as a portion of the monthly payment is applied. Interest pertains to the cost of borrowing the money. Taxes and Insurance refer to the property taxes and homeowner's insurance payments that are due each month. Whether or not funds are escrowed for Insurance and Taxes is irrelavent.
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Private Mortgage Insurance (PMI) - Typically required in situations where the LTV is greater that 80% as a way to protect the lender in the event the borrower defaults on the loan.
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Qualifying Ratios - These are actually two calculations that are commonly used to help determine whether or not a loan applicant can qualify for a loan. The first is the ratio of income to housing expense and the second is the ratio of income to debt liabilities.
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Rate Lock - An agreement by a lender to lock in a rate of interest and any other costs associated with a loan for a specific time period.
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Real Estate Agent - An individual with the proper training, experience and licensing needed to handle most aspects of the home sales negotiation and home selling processes. Buyers and sellers are typically represented by their own agents.
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Real Estate Supplement Procedures Act (RESPA)- This law ensures that borrowers are made aware in advance of all costs associated with a loan because it requires the lender to outline each.
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Realtor - To be considered a Realtor, a person must an active member of a local-level real estate board that has an affiliation with the National Association of Realtors.
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Recording - The act of making a note in the appropriate section of local Office of the Registrar so that the notation becomes a part of the public record. In real estate, the types of documents recorded include deeds, mortgage notes, satisfaction of a mortgage note, and extensions of mortgages.
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Refinance - Taking out a new loan on a property (usually with more favorable terms) for the purpose of paying off the current loan with the proceeds from the new loan. The security for the new loan is the same property.
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Revolving Liability - An arrangement for credit, like that which is made when applying for a credit card, that enables a consumer to purchase services or goods against a line of credit that has been preapproved.
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Secondary Mortgage Market - The market that has been set up for the purpose of selling and buying mortgages that already exist.
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Security - For a loan to be approved, something must be used as collateral. In the case of mortgages, the property is typically used for this purpose.
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Seller Carry-Back - A situation where the seller of the property is willing and able to provide the financing, usually by offering an assumable type of mortgage. See Onwer Financing.
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Servicer - A company in the business of collecting a borrower's principal and interest payments, and managing a borrower's escrow account. It is more common to find Servicers working with mortgages that have purchased on the secondary market.
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Standard Payment Calculation - A way of attempting to divide the remaining mortgage balance into equal monthly mortgage payments after factoring in the current interest rate.
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Step-Rate Mortgage - A type of mortgage in which the rate of interest is allowed to increase for a period of time. As a result, monthly payments also increase. After the specified period of time has expired, there is no further change to either the interest rate or the amount of the payment for the remaining loan term.
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Third-Party Origination - Use of another party to assist with a lender's loan process. This other party can be involved in any aspect of the loan including underwriting, processing, closing and even helping to prepare loan for sale in the secondary market.
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Total Expense Ratio - A way of determining the amount of a person's gross monthly income that is already allocated to covering that person's monthly debts including expenses related to housing.
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Treasury Index - An index that is used on certain ARMs that helps to determine changes to the interest rate. This index is based on the US Treasury's auctions held on such items as securities and treasury bills. It's also derived from the Treasury's daily yield curves.
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Truth-In-Lending - A law that was passed by the federal government that requires every lender to fully disclose all mortgage terms and conditions itemize every expense involved with a loan, especially the APR.
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Two-Step Mortgage - This is a variation of the ARM that features one rate of interest for the first x number of years (usually 5 or 7) and another rate of interest for the remaining term of amortization.
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Underwriting - A careful and detailed analysis of a loan application carried out for the purpose of attempting to determine the amount of risk the lender is likely to undertake should the loan be approved. Underwriters analyze both the applicants as well as the property being purchased.
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VA Mortgage - Known also as a government mortgage, these mortgages are guaranteed and backed by the Department of Veteran's Affairs.
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Wrap-Around Mortgage - This is a special type of mortgage where a new or second lender writes a new loan while assuming the responsibility for the borrower's existing mortgage. The borrower makes one payment to the new lender who then applies the principal and interest to both the new loan and the existing one. Not all first mortgage lenders recognize a wrap-around mortgage and it could be cause for foreclosure.
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