Common Mortgage Terms
(Click on hyperlinks for additional
information)
An interest rate
that changes periodically in relation to an index. Payments may increase
or decrease accordingly. See Adjustable Rate Mortgage for a complete
guide.
A mortgage whose
interest rate changes over time based on an index and a margin. Rate
changes are made at prescribed times and within prescribed limits (cap) as
defined in the mortgage contract.
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 Art, Regulation
Z. Includes upfront cost paid to obtain the loan, and is, therefore,
usually a higher amount than the interest rate stipulated in the mortgage
note. Does not include title insurance, appraisal, or credit report.
Application Fee:
Fee that is paid
to a mortgage company upon application. AEGIS does not charge an
application fee!
An initial
statement of personal and financial information which is required to
approve your loan.
A fee charged by
an appraiser to render an opinion of fair market value as of a specific
date. Required by most lenders to obtain a loan.
Amortize:
Reduce a debt by
regular payments of both principal and interest ("Fully
amortizing" means payments scheduled to pay off the debt completely
during a set term.)
Amortization schedule:
A timetable for
payment of a mortgage showing the amount of each payment applied to
interest and principal and the remaining balance.
Assessed Value:
The valuation
placed upon a property by a public tax assessor for the purposes of
taxation.
Balloon Payment:
A lump sum
payment for the unpaid balance of the loan.
A technique used
in purchase transactions through which the borrower receives the
equivalent of a reduced interest rate on their mortgage for one or two
years.
A temporary
loan (usually six months maximum) which allows a borrowers to use the
equity in their current primary residence to purchase a new home. The
bridge loan is secured by a first or second mortgage on the current
primary residence until it is sold or the maximum term of the loan has
been reached.
Cap:
A provision of an
ARM limiting how much the interest rate or mortgage payments may increase.
Cash reserve:
A requirement of
many lenders that buyer have sufficient cash remaining after closing to
make the first two mortgage payments.
Closing:
The occasion
where a sale is finalized; the buyer signs the mortgage, and closing costs
are paid. Also called "settlement".
A title that is
free of liens and legal questions as to ownership of the property.
Conforming Loan:
Generally, a
mortgage loan under $322,700. Qualifying ratios and underwriting
methods are standardized to a large degree.
Expenses (over
and above the price of the property) incurred by buyer and seller in
transferring ownership of a property. Also called "settlement
cost."
A report of an
individual's credit history prepared by a credit bureau and used by a
lender in determining a loan applicant's creditworthiness.
Condominium:
A form of
property ownership in which the homeowner holds title to an individual
dwelling unity plus an interest in common areas of a multi-unit project.
A type of
adjustable rate mortgage that allows the borrower to change from an ARM to
a fixed rate loan according to the term of the note and security
instrument.
The maximum
allowable interest rate over the life of the loan of an adjustable rate
mortgage.
Contract of Sale:
The agreement
between the buyer and seller on the purchase price, terms, and conditions
necessary to both parties to convey the title to the buyer.
Default:
Failure to make
mortgage payments on a timely basis or to comply with other conditions of
a mortgage instrument.
Deficiency Judgment:
A court order to
pay the balance owed on a loan if the proceeds from the security are
insufficient to pay the loan. Deficiency judgments are not allowed in all
states.
Debt Service:
The total amount
of credit card, auto, mortgage or other debt upon which you must pay.
Deed of trust:
The document used
in some states instead of a mortgage; title is conveyed to a trustee
rather than to the borrower.
Delinquency:
A loan in which a
payment is overdue but not yet in default.
Discount Points (or Points):
Discount points
are paid to obtain a lower interest rate on your mortgage. The more points
you pay, the lower the rate you may obtain. The longer you own your
property and continue to pay on the loan, the more likely it will be that
paying points will be advantageous for you. If you intend to hold the
mortgage for only a short period of time, the cost you pay upfront may
exceed the benefit you will receive from obtaining this lower rate. Each
point is equal to one percent (1%) of the loan amount (i.e., two points on
a $100,000. mortgage would equal to $2,000.
Document Preparation:
A fee charged by
the lender for the preparation of documents necessary to fund the loan.
This is a third party fee paid to an attorney.
The part of the
purchase price that the buyer pays in cash and does not finance with a
mortgage.
Due-on-sale clause:
A prevision in a
mortgage allowing the lender to demand payment in full if the borrower
sells the property securing the mortgage.
Deposit:
Cash paid to the
seller when a formal sales contract is signed.
Earnest Money:
A deposit given
to the seller to show that a prospective buyer is serious about buying the
home.
Escrow:
The holding of
documents and money by a neutral third party prior to closing.
Escrow Account:
The portion of a
borrower's monthly payment which is held by the servicer. (lender will pay
items such as property taxes, hazard insurance, and other items as they
become due.
Escrow Officer:
Usually the
employee of the title company who will be handling all aspects of the
closing. The Escrow fee found on the Settlement Statement is the Escrow
Officers charge (i.e.Title Company) for handling the transaction.
Effective Interest Rate:
The cost of
credit on a yearly basis expressed as a percentage. Includes up-front cost
paid to obtain the loan, and is, therefore, usually a higher amount than
interest rate stipulated in the mortgage note. Useful in comparing loan
programs with different rates and points.
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 lein position, taking priority over all other items, in the
event of default.
Fixed-Rate:
An interest rate
which is fixed for the life of the loan. Payments as well are fixed at one
amount.
Flood Insurance:
Insurance
required for properties in federally designated flood areas. These maps
are constantly changing.
Good Faith Estimate:
A written
estimate of closing costs which a lender must provide you within three
days of you submitting an application.
Graduated Payment Mortgage (GPM):
A mortgage that
starts with low monthly payments that increase at a predetermined rate. Be
aware that most GFM's include a negative amortization clause.
Gross Income:
For qualifying
purposes, the income of the borrower before taxes or expenses are
deducted.
Hazard Insurance:
Insurance to
protect the homeowner and the lender against physical damage to a property
from fire, wind, vandalism and other hazards.
Homeowner's Insurance:
An insurance
policy that combines liability coverage and hazard insurance.
HUD 1 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.
HUD:
A Cabinet
department responsible for the implementation and administration of
government housing and urban development. The broad range of programs
include community planning and development, low-rent public housing,
mortgage insurance for residential mortgages (FHA), equal opportunity in
housing, and research and technology.
(Also called
"Rate Index") A regularly published rate, independent of the
lending institution, that measures the prevailing cost of funds, and is
used periodically with the margin to set ARM rates.
Interest Rate Cap:
A provision of an
ARM limiting how much interest rates may increase in a given adjustment
period.
Jumbo Loans:
A Standard set
Minimum Loan Program amount. $300,700. and everything above. Usually a set
of different products and pricing slightly higher.
Lien:
A legal claim
against a property that must be paid when the property is sold.
Lifetime Cap:
A provision of an
ARM that limits the total increase in interest rates over the life of the
loan.
Loan Servicing:
The collection of
mortgage payments from borrowers and the related responsibilities of a
loan servicer, such as foreclosure, tax and insurance escrow, ect.
Loan-to-Value Ratio (LTV):
The total loan
amount divided by the value of the house.
*loan amount $160,000.(divided by value) $200,000. = 80% LTV.
Lock-in:
A written
agreement guaranteeing the home buyer a specified interest rate provided
the loan is closed with that buyer within a set period of time. The
lock-in also specifies the points to be paid at closing as well.
Margin:
An amount,
usually a percentage, which is added to the index to determine the
interest rate for adjustable rate mortgages.
Mortgage:
A legal document
that pledges a property to the lender as security for payment of a debt,
usually a loan on the house itself.
Mortgage Banker:
Originates
mortgage loans, loaning you their funds and closing the loan in their
name. Usually an employee of a bank, S&L.
Mortgage Broker:
As 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,
S&L's, banks, or investment bankers. In my situation at Mortgages
Direct, never at a higher consumer cost. And in most cases a discount.
The fee paid by a
borrower to FHA or a private insurer for mortgage insurance.
Mortgagee:
The lender in a
mortgage agreement.
Mortgagor:
The borrower in a
mortgage agreement.
Mortgage Note:
A legal document
obligating a borrower to repay a loan at a stated interest rate during a
specified period of time; The agreement is secured by a mortgage.
Negative Amortization:
Payment terms
under which the borrower's monthly payments do not cover the interest due,
as a result, the balance due is added to the loan balance making it (loan
balance) rise- thus "negative amortization" occurs.
No Closing Cost Deal:
In refinance or
purchases many programs are available with no closing cost. The rate is
raised slightly higher to absorb the cost, the lender gives a rebate which
is then applied to closing cost.
Origination Fee:
A fee paid to a
lender for processing a loan application. It is stated as a percentage of
the mortgage amount. Usually is equal to 1% or less of the loan amount.
PITI:
Stands for
principal, interest, taxes and insurance...the components of a monthly
mortgage payment.
Points:
A one-time charge
by the lender to increase or decrease the stated interest rate on a lone.
To decrease the interest rate, the borrower "pays" points, to
increase the interest rate, the borrower receives points which can be used
to reduce the closing cost. Each point is equal to one percent (1%) of the
loan amount.
Prepayment Penalty:
A fee paid to the
lending institution for paying a loan off prior to the scheduled maturity
date. Most everything I sell has no Prepayment Penalty Clause. Very
important to know on your new loan.
Prequalification:
The process of
determining how much money a prospective home buyer will be eligible to
borrower before a loan is applied for.
Prepaid Interest:
The amount of
interest to cover the period from close of escrows until the beginning of
the first payment.
Private Mortgage Insurance (PMI):
Insurance
provided by a nongovernmental insurer that protects lenders against a loss
if a borrower defaults. Usually required on all loans with an 'LTV' of
more than 80%.
Qualifying Ratios:
Guidelines
applied by lenders to determine how large a loan to grant the home buyer.
The debt-to-income ratio is your current monthly debt on loans and credit
cards divided by your gross income. The housing-to-income ratio is your
new housing total payment divided by your gross income. Standard ratios
28/36 on many special products the ratios are much greater for easier
qualifying.
Radon:
A radioactive gas
found in some homes that in sufficient concentrations can cause health
problems. Usually found in areas with basements. Depending on your area
the lender may require a radon check in your home.
Recording Fees:
Fee charged by
the County Clerk's office for recordation of Deed, Mortgage or Deed of
Trust, and, at times, additional documents requiring public notice. This
is a fee paid at closing for exact charges.
Real Estate Agent:
A person licensed
to negotiate and transact the sale of real estate on behalf of either the
borrower or seller, or in some cases both parties. Unless a Buyer Agent is
employed the buyer isn't fully represented.
Real Estate Settlement Procedures Act:
A customer
protection law that requires lenders to give borrowers advanced notice of
closing cost, including an "ARP".
A mortgage that
has rights that are subordinate to the rights of the first mortgage. As
such, these loans are often less secure and may demand a slightly higher
interest rate.
Secondary Mortgage Market:
The buying and
selling of existing mortgages.
Settlement Sheet:
The computation
of cost payable at closing which determines the seller's net proceeds and
the buyer's net payment.
Survey:
A drawing showing
the legal boundaries of the property, it's fixtures, and any easements or
encroachments.
Tenancy by entirety:
A type of joint
ownership of a property available only to a husband & wife.
Tenancy in common:
A type of joint
ownership in a property without right of survivorship.
The written
evidence that proves the right of ownership of a specific piece of
property.
Title Company:
A company that
specializes in title searches and insuring title to property. Title
companies are the third, neutral party in a transaction. This company does
not work for any specific person in the transaction, in accordance with
state law.
Protection for
lenders or homeowners against financial loss resulting from legal defects
in the title.
A check of the
title records to ensure that the seller is the legal owner of the property
and that there are no liens or other claims outstanding.
State or local
tax payable when title passes from one owner to another.
Truth-In-Lending:
A federal law
that requires lenders to full disclose, in writing, the terms and
conditions of a mortgage, including the ARP and other charges.
Tax Impound:
An amount for
taxes required and collected by the lender/collection agent and held in
the impound account to insure adequate funds are available to pay the
taxes.
Tax Service:
A fee charged by
the lender to insure that the tax bill is mailed to the lender for payment
from the appropriate impound account. ($60-110).
Underwriting:
A fee charged by
the lender to approve the loan.($100-350). The process of evaluating a
loan application to determine the risk involved for the lender.
Variable Rate:
An
interest rate that changes periodically in relationship to an index.
Payments may increase or decrease accordingly. |