Mortgage Terms DefinedAdjustable Rate -- An interest rate that changes periodically in relation to an index (see Index). Payments may increase or decrease accordingly. Amortization -- A repayment method in which the amount you borrow is repaid gradually though regular monthly payments of principal and interest. During the first few years, most of each payment is applied toward the interest owed. During the final years of the loan, payment amounts are applied almost exclusively to the remaining principal. Annual Percentage Rate (APR) -- The cost of credit on a yearly basis, expressed as a percentage. Required to be disclosed by the lender under the Federal Truth in Lending Act, Regulation Z. Includes up-front costs paid to obtain the loan, and is, therefore, usually a higher amount than the interest rate stipulated in the mortgage note. Application -- An initial statement of personal and financial information which is required to underwrite and make a credit decision for a mortgage loan. Application Fee -- Fee(s) that are paid upon application. An application fee may frequently include charges for property appraisal ($200-$400) and a credit report ($30-50). Appraisal -- A report which attempts to determine the market value of a subject home by comparing it to other homes of similar size, design etc. that have sold under market conditions. Balloon Payment -- A lump sum payment for the unpaid principal balance of the loan. Cap -- The maximum allowable increase, for either payment or interest rate, for a specified amount of time on an adjustable rate mortgage. Ceiling -- The maximum allowable interest rate over the life of the loan of an adjustable rate mortgage. Also referred to as "lifetime cap". Closing Costs -- Any fees paid by the borrowers or sellers during the closing of the mortgage loan. This normally includes an origination fee, discount points, escrow fees, title insurance, survey, and any items which must be prepaid, such as taxes and insurance escrow payments. Conforming Loan -- Generally, a mortgage loan under $333,700. Qualifying ratios and underwriting methods are standardized to a large degree. Debt Service -- The total amount of credit card, auto, mortgage or other debt upon which you must pay. Deed of Trust -- Used in many western states, the agreement used to pledge your home or other real estate as security for a loan. Discount Points (or Points) -- The amount paid either to maintain or lower the interest rate charged. Each point is equal to one percent (1%) of the loan amount (i.e., two points on a $100,000 mortgage would equal $2,000). Down Payment -- The difference between the purchase price and that portion of the purchase price being financed. Due on Sale -- A clause in a mortgage agreement providing that, if the borrower sells, transfers, or, in some instances, encumbers the property, the lender has the right to demand the outstanding balance in full. Encumbrance -- A claim against a property by another party which usually affects the ability to transfer ownership of the property. Equity -- The difference between the fair market value (appraised value) of your home and your outstanding mortgage balance. First Mortgage -- A mortgage which is in first lien position, taking priority over all other liens (which are financial encumbrances). Fixed Rate -- An interest rate which is fixed for the term of the loan. Payments as well are fixed at one amount. Good Faith Estimate -- A written estimate of closing costs which a lender must provide you within three days of submitting an application. Grace Period -- A period of time during which a loan payment may be paid after its due date but not incur a late penalty. Such late payments may be reported on your credit report. Gross Income -- For qualifying purposes, the income of the borrower before taxes or expenses are deducted. Hazard Insurance -- A contract between homeowner and an insurer, to compensate the homeowner for loss of property due to hazards (fire, hail damage, etc.), for a premium. HUD I Settlement Statement -- A form utilized at loan closing to itemize the costs associated with purchasing the home. Used universally by mandate of HUD, the Department of Housing and Urban Development. Index -- A rate or market cost of funds used by lenders as a barometer to determine when and if adjustments on variable / adjustable rate loans should be made. A common index (though not used on first lien mortgages typically) is the Prime Rate. Other common indexes include the Cost of Funds for the Eleventh Federal District of banks or the average rate of a one year Government Treasury Security. Lenders will add a margin (see margin) to this index value as agreed to by contract to determine the rate on an adjustable loan. Interest Rate -- The periodic charge, expressed as a percentage, for use of credit. Jumbo Loan -- Mortgage loans over $333,700. Terms and underwriting requirements may vary from conforming loans. Loan to Value Ratio (LTV) -- A ratio determined by dividing the sales price or appraised value into the loan amount and expressed as a percentage. For example, with a sales price of $100,000 and a mortgage loan of $80,000, your loan to value ratio would be 80%. Lock or Lock In -- A commitment you obtain from a lender assuring you a particular interest rate or feature for a definite time period. Provides protection should interest rates rise between the time you apply for a loan, acquire loan approval, and, subsequently, close the loan and receive the funds you have borrowed. Margin -- An amount, usually a percentage, which is added to the index to determine the interest rate for adjustable rate mortgages. Mortgage Banker -- Originates mortgage loans, loaning you their funds and closing the loan in their name. Mortgage Broker -- As do mortgage bankers, takes loan application and processes the necessary paperwork. Unlike a mortgage banker, brokers do not fund the loan with their own money, but work on behalf of several investors, such as mortgage bankers, banks, or investment bankers. Mortgage Insurance (MIP or PMI) -- Insurance purchased by the borrower to insure the lender or the government against loss should the borrower default. A common misconception is that such insurance pays off the loan in the case of death. Mortgage Loan -- A loan which utilizes real estate as security or collateral to provide for repayment should you default on the terms of your loan. The mortgage or Deed of Trust is your agreement to pledge your home or other real estate as security. Mortgagee -- The lender in a mortgage loan transaction. Mortgagor -- The borrower in a mortgage loan transaction. Negative Amortization -- Amortization in which the payment made is insufficient to fund complete repayment of the loan at its termination. Usually occurs when the increase in the monthly payment is limited by a ceiling. The portion of the payment which should be paid is added to the remaining balance owed. The balance owed may increase, rather than decrease over the life of the loan. PITI -- Principal, interest, taxes and insurance, which comprise your monthly mortgage payment. Points -- The amount paid either to maintain or lower the interest rate charged. Each point is equal to one percent (1%) of the loan amount (i.e., two points on a $100,000 mortgage would equal $2,000). Prepayment Penalty -- A fee paid to the lending institution for paying a loan prior to the scheduled maturity date. Qualifying Ratios -- A relationship between a borrower's debts to their income acceptable to a lender and seen as the borrower's ability to afford the monthly mortgage payments. Servicing a Loan -- The ongoing process of collecting your monthly mortgage payment, including accounting for and payment of your yearly tax and/or homeowners insurance bills. Title -- The written evidence that proves the right of ownership of a specific piece of property. Title Insurance -- Protection for lenders or home buyers against financial loss resulting from legal defects in the title. Underwriting -- The process of verifying data and approving a loan. Variable Rate -- An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly. Also referred to as an adjustable rate. VA Loan -- More appropriately termed "VA Insured Loan." A loan for which the Veteran's Administration insures the lender against losses the lender may incur due to the borrower's default. Available only to veterans possessing a Certificate of Eligibility |
