A Higher Standard

Mortgage Glossary

A

Adjustable Rate Mortgage (ARM) – A mortgage in which the interest rate is adjusted periodically based on an index. Also called a variable rate mortgage.

Adjustment date – The date the interest rate changes on an ARM (adjustable rate mortgage).

Amortization – Literally to “kill off” (root: mort) the outstanding balance of a loan by making equal payments on a regular schedule (usually monthly). The payments are structured so that the borrower pays both interest and principal with each equal payment.

Annual Percentage Rate (APR) – A figure that states the total yearly cost of a mortgage as expressed by the actual rate of interest paid. The APR includes the base interest rate, points, and any other add-on loan fees and costs. As a result the APR is invariably higher for the rate of interest that the lender quotes for the mortgage but gives a more accurate picture of the likely cost of the loan. Keep in mind, however, that most mortgages are not held for their full 15 or 30 year terms, so the effective annual percentage rate is higher than the quoted APR because the points and loan fees are spread out over fewer years.

Appraisal – The determination of property value based on recent sales information of similar properties.

Appreciation – Increases in property value due to fluctuations in the market, inflation, et al.

Asset – Valuable items encumbered or not, owned by a person, corporation, or entity.

 

B

Bridge Loan – An equity loan secured to solve short-term financing problem.

Buydown – Allows loans to be made at less-than-market interest rates by paying front-end discounts. The interest rate is brought down for a temporary period, usually from one to three years. In order to acquire this discount, a lump sum is paid and held in an account used to supplement the borrower’s monthly payment. After the discount period, the payment is calculated as the note rate.

 

C

Caps – A set percentage amount by which an adjustable rate mortgage may adjust each adjustment period. For adjustable loans, caps are usually quoted as two numbers as in 2/6. The first number indicates how much a loan may adjust at each adjustment period while the second number indicates how much a loan may adjust over its lifetime.

Loans like the 3/1 and 5/1 adjustable which have an initial fixed period are quoted with 3 numbers as in 3/2/6 which would mean that the first adjustment may be as much as 3%, subsequent adjustments are capped at 2% each, and the lifetime cap is 6%.

Two-Step loans are quoted with a single cap, which is the amount by which the loan may adjust at its single adjustment date.

Clear Title – A title that is free of liens or any legal question as to the ownership of the property.

Closing – Final arrangements to transfer title of property as well as allocate charges and credits.

Closing Costs – Closing costs are fees paid by the borrower when a property is purchased or refinanced. Costs incurred include a loan origination fee, discount points, appraisal fee, title search, title insurance, survey, taxes, deed recording fee, and credit report charges. All closing costs are separated into “non-recurring,” and “pre-paid.” Non-recurring charges are any items that are paid only once because a loan was obtained or a property bought, such as a loan origination fee. Pre-paid charges are those that recur over time, like insurance and property taxes. These are summarized in the Good Faith Estimate.

Collateral – Property, real or personal, pledged as a security to back up a promise. In a home loan, the property is considered collateral that can be revoked if loan is not repaid according to the terms of the mortgage or deed of trust.

Construction Loan – A short term loan for funding the cost of construction. The lender advances funds to the builder as the work progresses.

Conventional Mortgage – A mortgage loan that is obtained without any additional guarantees for repayment, such as FHA insurance, VA guarantees, or private insurance. This is usually given at an 80% loan-to-value ratio.

Credit Rating – Borrowers are rated by lenders according to the borrower’s credit-worthiness or risk profile. Credit ratings are expressed as letter grades such as A-, B, or C+. These ratings are based on various factors such as a borrower’s payment history, foreclosures, bankruptcies and charge-offs. There is no exact science to rating a borrower’s credit, and different lenders may assign different grades to the same borrower.

Credit Report – A report to a prospective lender on the credit standing of a prospective borrower. Used to help determine creditworthiness. Information regarding late payments, defaults, or bankruptcies will appear here.

 

D

Debt-to-Income Ratio (DTI) – The ratio of aggregate monthly debt to aggregate monthly income.

Deed – A legal document which affects the transfer of ownership of real estate from the seller to the buyer.

Deed of Trust – Synonymous to a mortgage. A deed of trust or mortgage is obtained, depending on the state in which the borrower will reside.

Deposit – A lump sum given in advance as security. A deposit is always paid of a larger amount to be paid in the future. In mortgage and real estate terms, this is called the “earnest money deposit.”

Down Payment – Money paid by a buyer from his own funds, as opposed to that portion of the purchase price which is financed.

 

E

Earnest Money Deposit – A deposit made by a potential home buyer to show that they are serious about purchasing the property.

Equity – The difference between the current market value of a property and the principal balance of all outstanding loans.

Escrow – A third party agent that receives, holds, and/or disburses certain funds or documents upon the performance of certain conditions. For example, an earnest money deposit is put into escrow until the transaction is closed. Only then can the seller receive the deposit.

 

F

Federal Housing Administration (FHA) – An agency under the U.S. Department of Housing and Urban Development (HUD), it insures loans made by approved lenders to qualified borrowers, in accordance with its regulations.

Fees – Up-front costs associated with a loan. Clicking on the word VIEW shown under the “Fees Detail” column on the quotes results page will display detailed information about the financial institution’s fees and requirements pertaining to that rate.

Finance Charge – The total dollar amount your loan will cost you. It includes all interest payments for the life of the loan, any interest paid at closing, your origination fee and any other charges paid to the lender and/or broker. Appraisal, credit report and title search fees are not included in the finance charge calculation.

First Mortgage – A mortgage that has priority over other mortgages.

Fixed-Rate Mortgage – A mortgage where the interest rate does not change for the life of the loan.

 

G

Good Faith Estimate – An estimate of charges which a borrower is likely to incur in connection with a loan closing.

Gross Monthly Income – The total amount the borrower earns per month, not counting any taxes or expenses. Often used in calculations to determine whether a borrower qualifies for a particular loan.

 

H

Hazard Insurance – A form of insurance in which the insurance company protects the insured from certain losses, such as fire, vandalism, storms and certain other natural causes.

Home equity line of credit – A mortgage loan in second position that allows a borrower to obtain cash drawn against home equity, up to a certain amount.

Homeowner’s insurance – An insurance policy that combines personal liability insurance and hazard insurance for a home and its contents.

Homeowner’s warranty – An insurance policy that is purchased by a buyer that covers certain repairs, should they be necessary over a certain period.

 

I

Interest – Consideration in the form of money paid for the use of money, usually expressed as an annual percentage. Also, a right, share, or title in property.

Interest Only – A term loan arrangement calling for payments of interest only, not to include any amount for principal.

Interest Rate – The percentage of an amount of money that’s paid for its use over a specified time period.

 

J

Jumbo Loan – A loan for $417,001 or more in the continental United States (Alaska and Hawaii limits are higher). These limits are 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

Lender – The bank, mortgage company, or mortgage broker offering the loan. Many institutions only “originate” loans and then resell the obligation to third parties.

Lien – A legal claim by one party against the property of another as security for a debt. Must be paid off when property is sold. A mortgage or a first trust deed is a lien.

Loan – The principal, or amount of total borrowed money, that is repaid with interest.

Loan Amount – The amount of money that you intend on borrowing from a financial institution for the purchase of your home. Subtracting the down payment from the purchase price of the home will provide you with the loan amount.

Loan-To-Value Ratio – The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage. A LTV ratio of 90 means that a borrower is borrowing 90% of the value of the property and paying 10% as a down payment. For purchases, the value of the property is assumed to be the purchase price, for refinances the value is determined by an appraisal.

 

M

Maturity – The “Due Date” of a loan.

Mortgage – A legal document that pledges property to a creditor for the repayment of the loan, and is the term used to describe the loan itself. Some states use the term First Trust Deeds to refer to mortgage loans.

Mortgage Insurance – Insurance that covers the lender against losses incurred as a result of a default on a home loan. This is usually required on all loans that have a loan-to-value higher than eighty percent. Mortgages that have an 80% LTV that do not require mortgage insurance have higher interest rates. The lenders then pay the mortgage insurance themselves. In addition, FHA loans and some first-time homebuyer programs require mortgage insurance regardless of the loan-to-value.

 

N

Net Effective Income – Gross income less federal income tax.

Note – A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.

 

O

Origination Fee – The fee imposed by a lender to cover certain processing expenses in connection with making a loan. Usually a percentage of the amount loaned.

Owner Financing – A property purchase that is partly or wholly financed by the seller.

Owner’s Title Policy – A policy protecting the buyer for the amount of the purchase price in the event of a future title dispute.

 

P

Personal Property – Movable property that does not fit the definition of realty.

PITI – PITI stands for principal, interest, taxes, and insurance. An “impounded” loan means that the monthly payment covers all of these, and perhaps mortgage insurance, if your loan so calls for it. If one does not have an “impounded” account, then the lender still calculates these amounts separately and uses it as part of determining one’s debt-to-income ratio.

Pre-Approval – A term used to mean that a borrower has completed a loan application and provided debt, income, and savings information that has been reviewed and pre-approved by an underwriter.

Private Mortgage Insurance (PMI) – Paid by a borrower to protect the lender in case of default. PMI is typically charged to the borrower when the Loan-to-Value Ratio is greater than 80%.

Promissory Note – A written promise to repay a specified amount over a specified period of time.

 

Q

Quitclaim Deed – A deed that transfers, without warranty, whatever interest or title a grantor may have at the time the conveyance is made.

 

R

Rate Lock – A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate for a specified period of time at a specific cost.

Real Estate – A portion of the earth’s surface extending downward to the center to the earth and upward into space, including all things permanently attached thereto by nature or man and all legal rights therein.

Recording – The formal filing of documents affecting a property’s title.

Refinancing – The process of paying off one loan with the proceeds from a new loan, using the same property as security.

 

S

Security – Something given, deposited, or pledged to make secure the fulfillment of an obligation, usually the repayment of a debt.

Servicer – An organization that collects principal and interest payments from borrowers and manages borrowers’ escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.

Settlement Costs – See Closing Costs.

 

T

Title – A legal document showing a person’s right to or ownership of a property.

Title Insurance – Title Insurance policies typically insure a homebuyer against any title-search errors or mistakes and against loss due to disputes over property ownership. Title Insurance can additionally offer protection to the lender under similar circumstances. The cost of title insurance is usually a set value per thousand of dollars of the total loan amount.

Title Search – A check of the title records to make sure that the seller is the actual legal owner of the property, and that there are no liens or other claims outstanding.

Total Debt Ratio – Monthly debt and housing payments divided by gross monthly income. Also known as Back-End Ratio.

 

V

VA Loan – A government-backed mortgage loan supported by the US Veterans Administration.

Variable Rate Mortgage – See Adjustable Rate Mortgage.

Vested – Means that one has a right to use a portion of a fund, such as an individual’s retirement fund.

 

Z

Zero Percent Financing – A loan with no interest in the contract. The IRS imputes 10 percent for both borrower and lender.

Zoning – The right of a community, under its police power, to dictate the use of property within its boundaries.