Allows the lender to speed up the rate at which your loan comes due or to demand immediate payment of the entire outstanding loan balance should you default on your loan.
Adjustable Rate Mortgage (ARM)
A mortgage in which the interest rate is adjusted periodically based on a pre-selected index. It is also sometimes referred to as the renegotiable-rate mortgage, variable-rate mortgage, or Canadian-rollover mortgage.
Adjustment Interval
On an adjustable-rate mortgage, it is the time between changes in the interest rate and/or monthly payment — typically one, three or five years, depending on the index.
Amortization
Loan payment of equal periodic payments calculated to pay off the debt, as well as the accrued interest on the outstanding balance, at the end of a fixed period.
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 licensed professional called an appraiser.
Assumption
Agreement between buyer and seller, where the buyer takes over (assumes) the payments on an existing mortgage from the seller. Assuming a loan usually saves the buyer money because an existing mortgage debt does not require closing costs or new, potentially higher, market-rate interest charges.
B
Balloon (Payment) Mortgage
Usually a short-term, fixed-rate loan that involves small payments for a determined period of time and one large payment for the remaining amount of the principal at a time specified in the contract.
Broker
An individual licensed to assist in arranging funding or negotiating contracts for a client who does not personally loan the money. Brokers usually charge a fee or receive a commission for their services.
Buy-Down
Occurs when the lender, the homebuilder, or both subsidize your mortgage thereby lowering the interest rate during the first few years of the loan. While the payments are initially low, they increase when the subsidy expires.
C
Cash Out
In a cash out, you receive the difference between the loan amount and the closing costs plus purchase or refinance costs.
Closing
The meeting between you, the seller, and the lender (or their agents) during which the property and funds legally change hands. It is often referred to as the settlement.
Closing Cost Expenses
Over and above the price of the property, incurred by buyers and sellers in transferring ownership of a property. Usually they include an origination fee, attorney’s fee, appraisal fee, taxes, deed recording fee, credit report charge, and charges for obtaining title insurance and a survey. The costs of closing usually are about 3 percent to 6 percent of the mortgage amount.
Closing Costs
Costs associated with the loan, which are assessed at settlement. When closing costs are included in the loan, they are added to the loan balance instead of being paid by homebuyer in one lump sum at the close of escrow. When not included, the homebuyer pays the costs assessed at settlement in one lump.
Closing Costs Expenses
Over and above the price of the property, incurred by buyers and sellers in transferring ownership of a property. Usually they include an origination fee, attorney’s fee, appraisal fee, taxes, deed recording fee, credit report charge, and charges for obtaining title insurance and a survey. The costs of closing usually are about 3 percent to 6 percent of the mortgage amount.
Commitment Agreement
Often in writing, an agreement between a lender and member to loan money at a future date, subject to the completion of paperwork or compliance with stated conditions.
Conforming Loans
A loan that is less than the limit that has been set by the Federal Housing Finance Agency (FHFA).
Construction Loan
A short term, interim loan used to finance home construction. The lender advances funds to the builder at periodic intervals as the work progresses.
Conventional Loan
A loan used for financing the cost of purchasing or refinancing a home that is not insured by the FHA or guaranteed by the VA or Farmers Home Administration (FMHA).
Credit Report
A report of an individual’s credit history, obtained from a reputable credit bureau that summarizes their liabilities and verifies any liens or late payments. The report is used by a lender in determining a loan applicant’s creditworthiness.
D
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 mortgage.
Deferred Interest
When the monthly payment is not sufficient to cover the monthly interest on the loan, the difference is added to the principal balance.
Delinquency
Failure to make payments on time. This can lead to foreclosure.
Department Of Veterans Affairs (VA)
Independent agency of the federal government that guarantees long-term, low- or no-down payment mortgages to eligible veterans. See VA Loans.
Dept-To-Income Ratio
The ratio, expressed as a percentage, which results when your housing expenses are divided by your net effective income (FHA/VA loans) or gross monthly income (conventional loans). See housing expense-to-income ratio.
Discount Points
One-time charge imposed by the lender or broker to lower the rate at which the lender or broker would otherwise offer the loan. It is sometimes referred to as a “loan discount.”
Down Payments
Money paid to make up the difference between the purchase price and mortgage amount. Down payments usually are 10 to 20 percent of the sales price on conventional loans. They can be less on FHA and VA loans.
Due-On-Sale Clause
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.
E
Earnest Money
Money given by a buyer to a seller, through a title company, 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 available, without discrimination based on race, color, religion, national origin, age, sex, marital status or receipt of income from public assistance programs.
Equity
Difference between the fair market value of the home and current indebtedness, also referred to as the owner’s interest.
Escrow
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 you pay money for tax or insurance payments.
F
Fannie Mae Federal National Mortgage Association
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 provides funds for one in seven mortgages, makes mortgage money more available and more affordable.
Farmers Home Administration (FMHA)
Provides financing to farmers and other qualified members who are unable to obtain loans elsewhere.
Federal Home Loan Mortgage Corporation (FHLMC)
See Freddie Mac.
Federal Housing Administration (FHA)
Division of the Department of Housing and Urban Development. Its main activity is insuring residential mortgage loans made by private lenders. The FHA also sets standards for underwriting mortgages.
Federal National Mortgage Association (FNMA)
See Fannie Mae.
FHA Loan
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.
FHA Mortgage Insurance
FHA mortgage insurance protects lenders in case of a default by the member of the FHA loan. The FHA mortgage insurance cost is borne by the homebuyer and is required primarily on members making a down payment of less than 20%.
First Mortgage
Mortgage that is the primary lien against a property.
Fixed-Rate Mortgage
Mortgage on which the interest rate does not change for the term of the loan.
Foreclosure
Legal procedure in which property securing debt is sold by the lender to pay the defaulting member’s debt.
Freddie Mac
Also known as Federal Home Loan Mortgage Corporation. A credited agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers.
G
Ginnie Mae
Also known as Government National Mortgage Association. It provides sources of funds for residential mortgages that are insured or guaranteed by FHA or VA.
Good Faith Estimate (GFE)
Estimate of charges likely incurred in connection with a settlement.
Government National Mortgage Association (GNMA)
See Ginnie Mae.
Graduated Payment Mortgage (GPM)
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
Total amount the member earns per month, before any expenses, taxes, and so on are deducted.
Guarantee Promise
Promise by one party to pay a debt or perform an obligation contracted by another party, if the original party fails to pay or perform according to a contract.
H
Hazard Insurance
Form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm, and so on.
Housing Expense-To-Income Ratio
Expressed as a percentage, which results when housing expenses are divided by net effective income (FHA/VA loans) or gross monthly income (conventional loans). See debt-to-income ratio.
I
Impound
Portion of your monthly payments held by the lender to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as reserves.
Index
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, which is then used to adjust the interest rate up or down on an adjustable mortgage. (Investments could include one or more of the following: one, three, and five-year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, the monthly average costs-of-funds incurred by savings and loans.)
Interest Cap
A consumer safeguard for adjustable rate mortgages that limits the amount interest rates may change per year, for the life of the loan, or both.
Investor
Money source for a lender.
J
Jumbo Loan
Loan that is larger than $417,000–the limit is 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.
L
Lien
Claim made on a property in order to satisfy the debt or obligation.
Loan-To-Value Ratio (LTV)
Relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.
M
Margin
Amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.
Market Value
Highest price that the 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.
Monthly Housing Expense
Principal, interest, taxes, and insurance. Also called PITI.
Mortgage
A legal document that pledges a property to the lender as security for payment of a debt, or the deed by which such a transaction is effected.
Mortgage Insurance (MI)
Insurance written by an independent mortgage insurance company protecting the mortgage lender against loss incurred by a mortgage default. MI is usually required for loans with a loan-to-value ratio of 80.01% or higher and when the down payment is less than 20 percent. See private mortgage insurance and FHA mortgage insurance.
Mortgagee
The mortgage lender.
Mortgagor
The member or homeowner.
N
Negative Amortization
Occurs when 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 member’s gross income less federal income tax.
No Cost Loan
A loan that has no points or closing costs. The interest rate will be higher than the interest rate on loans that assess points and closing costs.
No Points Loan
A loan that does not charge any points, but does assess closing costs. Often referred to as a zero point loan.
Non-Assumption Clause
A statement in a mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender.
Non-Owner Occupied
A property used as a rental, which is not a vacation home or primary residence of the member.
O
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 face value of the loan.
P
Payment Cap
A consumer safeguard for adjustable rate mortgages that limits the amount monthly payments may change.
PITI
Principal, Interest, Taxes, and Insurance. Also called monthly housing expense.
Points (Loan Discount Points)
Prepaid interest assessed at closing by the lender. It is the percentage of the loan amount that is credited to the member. Each point is equal to 1 percent of the loan amount. For example, two points on a $100,000 mortgage is $2,000.
Power Of Attorney
A legal document authorizing one person to act on behalf of another.
Pre-Approval
An analysis of the member’s position without a specific property identified.
Prepaids
Expenses necessary to create an escrow account or to adjust the seller’s existing escrow account. Prepaids can include taxes, hazard insurance, private mortgage insurance, and special assessments.
Prepayment
A privilege in a mortgage permitting the member to make payments in advance of their due date.
Prepayment Penalty
Money charged for an early repayment of debt. Prepayment penalties are legal in some form in 36 states and the District of Columbia.
Pre-Qualification
A general analysis of members financial position, with a specific property identified, compared to the Lender’s established guidelines.
Principal
The amount of debt, excluding the interest, left on a loan.
Private Mortgage Insurance (PMI)
In the event that the member does not have a twenty percent (20%) down payment, lenders will allow a smaller down payment, sometimes as low as 5 percent. With the smaller down payment loans, however, members 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. As an example, a $75,000 house with a ten percent (10%) down payment, would require 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.
Q
Qualifying Ratio
The ratio of your fixed monthly expenses to your gross monthly income. It is used to determine how much you can afford to borrow. The fixed monthly expenses would include PITI along with other obligations such as student loans, car loans, or credit card payments.
R
Rate Lock
A written agreement guaranteeing the homebuyer a specified interest rate provided the loan is closed within a set period of time. The lock-in also usually specifies the number of points to be paid at closing.
Realtor
A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors.
Rebate
Compensation from the lender, which can be used to cover closing costs, or received as a cash refund to you. A rebate occurs when the rate is high enough that the lender credits points as a percentage of the loan amount. Loans with rebates often carry higher interest rates than loans with points.
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.
Rescission
The cancellation of a contract. With respect to mortgage refinancing, the law gives homeowners three days to cancel a contract, once it is signed, if the transaction uses equity in the home as security.
RESPA
Acronym for the Real Estate Settlement Procedures Act. RESPA is a federal law that allows consumers to review information on known or estimated settlement costs one time after application and one time prior to or at settlement. The law requires lenders to furnish information after application only.
Reverse Annuity Mortgage (RAM)
A mortgage in which the lender makes periodic payments to the homeowner using the home’s equity as security.
S
Second Mortgage
A lien on the property in second position, utilizing the available equity, purchased to avoid paying private mortgage insurance. Often used for home improvements, debt consolidation, and so on.
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
The meeting between the buyer, the seller, and the lender (or their agents), where the property and funds legally change hands. It is often referred to as the closing.
Settlement 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 settlement costs are usually about 3 to 6 percent of the mortgage amount.
Shared Appreciation Mortgage (SAM)
Mortgage in which you receive 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 value of the property. May also apply to mortgages that share the monthly principal and interest payments with another party in exchange for a part of the appreciation.
Survey
Measurement of land, prepared by a registers land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any building.
T
Term Mortgage
Usually a short-term, fixed-rate loan which involves small payments for a determined period of time and one large payment for the remaining amount of the principal at a time specified in the contract. Sometimes referred to as a balloon payment mortgage.
Title
Document that gives evidence of an individual’s ownership of property.
Title Insurance
A policy, usually issued by a title insurance company, which insures you against errors in the title search. The cost of the policy is usually a function of the value of the property, and can be paid by the purchaser, the seller, or both.
Title Search
Examination of municipal records to determine the legal ownership of property. Usually is performed by a title company.
Truth-In-Lending
Federal law requiring disclosure of the annual percentage rate to homebuyers shortly after they apply for the loan.
Two-Step Mortgage
Mortgage in which you receive a below-market interest rate for a specified number of years (most often seven or 10 years), and then receive 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. It is also referred to as a Super Seven or Premier mortgage.
U
Underwriting Decision
Decision, made by an underwriter, whether to grant a loan to a potential homebuyer based on credit, employment, assets, and other factors. This decision also includes the matching of the risk to an appropriate rate and term or loan amount.
V
VA Loan
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.
VA Mortgage Funding Fee
First-time members of VA loans are required to pay a closing cost, called a funding fee, in order for the Department of Veteran Affairs to originate the loan. This funding fee is required by law and will vary in amount depending on the type of VA loan being borrowed and any previous use of entitlement.
Variable-Rate Mortgage (VRM)
Mortgage in which the interest rate is adjusted periodically, based on a pre-selected index. It is also sometimes referred to as the renegotiable-rate mortgage, the variable-rate mortgage or the Canadian-rollover mortgage. Sometimes referred to as an adjustable-rate mortgage.
Verification of Deposit (VOD)
Document signed by the financial institution verifying the status and balance of the member’s financial accounts.
Verification of Employment
Document signed by member’s employer verifying position, date of hire, and salary.
W
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 keeping the additional amount.