Glossary of Mortgage Terms

[ A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z ]

Acceleration Clause Allows the lender to speed up the rate at which your loan comes due or even to demand immediate payment of the entire outstanding balance of the loan should your default on you loan. Adjustable Rate Mortgage (ARM) Is a mortgage in which the interest rate is adjusted periodically based on a pre-selected index. Also sometimes known as the renegotiable rate mortgage. Adjustment Interval On an adjustable rate mortgage, the time between changes in the interest rate and/or monthly payment, typically one, three or five years, depending on the index. Amortization Means loan payment by equal periodic payments calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance. Amortization Schedule A timetable for payment of a mortgage showing the amount of each payment applied to interest and principal and the remaining balance on the loan. 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 qualified professional called an "appraiser."   Appreciation An increase in the value of a house due to changes in market conditions or other causes. Assessed Value The valuation placed upon a property by a public tax assessor for purposes of taxation. Assumption The agreement between buyer and seller where the buyer takes over the payments on an existing mortgage from the seller. Assuming a loan can usually save the buyer money since this is an existing mortgage debt, unlike a new mortgage where closing costs and new, possibly higher, market-rate interest charge will apply. Go top

Balloon (Payment) Mortgage Usually a short-term fixed-rate loan which involves small payments for a certain period of time and one large payment for the remaining amount of the principal at a time specified in the contract. Broker An individual in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money himself. Brokers usually charge a fee or receive a commission for their services. Buy down When the lender and/or the home builder subsidizes the mortgage by lowering the interest rate during the first few years of the loan. While the payments are initially low, they will increase when the subsidy expires. Go top

Cap (Interest Rate) Consumer safeguards which limit the amount the interest rate on an adjustable rate mortgage may change per year and/or the life of the loan. Caps (Payment) Consumer safeguards which limit the amount monthly payments on an adjustable rate mortgage may change. Cash Reserve A requirement of some lenders that buyers have sufficient cash remaining after closing to make the first two mortgage payments.   Clear Title A title that is free of liens and legal questions as to ownership of the property. Closing The meeting between the buyer, seller and lender or their agents where the property and funds legally change hands. Also called settlement. Closing 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 costs of closing usually are about 3 percent to 6 percent of the mortgage amount.   Combination Loan A simultaneously closing first and second mortgage. Commonly used to avoid Private Mortgage Insurance when a low down payment is desired. Commitment (Commitment Letter) An agreement, often in writing, between a lender and a borrower to loan money at a future date subject to the completion of paperwork or compliance with stated conditions. 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.   Construction Loan A short term interim loan for financing the cost of construction. The lender advances funds to the builder at periodic intervals as the work progresses. Contingency A condition that must be met before a contract is legally binding.   Conventional Loan A mortgage not insured by FHA or guarantee by the VA or Farmers Home Administration (FmHA). Convertible ARM An adjustable-rate mortgage that can be converted to a fixed-rate mortgage under specified conditions.   Credit Ratio The ratio, expressed as a percentage, which results when a borrower's monthly payment obligation on long-term debts is divided by his or her net effective income (FHA/VA loans) or gross monthly income (Conventional loans). See Housing Expenses-to-Income Ratio. Credit Report   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. Go top

Deed The legal document conveying title to a property. 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 See Negative Amortization. Delinquency Failure to make payments on time. This can lead to foreclosure. Department of Veterans Affairs (VA) An independent agency of the federal government which guarantees long-term, low- or no-down payment mortgages to eligible veterans. Deposit Cash paid to the seller when a formal sales contract is signed. Depreciation A decline in the value of a property; the opposite of "appreciation." Discount Points Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount (e.g. two points on a $100,000 mortgage would cost $2,000). Down Payment Money paid to make up the difference between the purchase price and mortgage amount. Down payments usually are 10 percent to 20 percent of the sales price on Conventional loans, and no money down up to 5 percent on FHA and VA loans. Due-On-Sale Clause A 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. Go top

Earnest Money Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment. Easement A right of way giving persons other than the owner access to or over a property. A common example is a utility easement, which gives the power company the right to put power lines and poles over properties to deliver electricity.   Equal Credit Opportunity Act (ECOA) Is 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 The difference between the fair market value and current indebtedness, also referred to as the owner's interest. Equity Loan A loan based on the borrower's equity in his or her home.   Escrow Refers to a 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 the homebuyer pays money for tax or insurance payments. Fair Credit Reporting Act A consumer protection law that sets up a procedure for correcting mistakes on one's credit record. Go top

Fannie Mae See Federal National Mortgage Association. Farmers Home Administration (FmHA) Provides financing to farmers and other qualified borrowers who are unable to obtain loans elsewhere. Federal Home Loan Mortgage Corporation (FHLMC) Also called Freddie Mac, is a quasi-governmental agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers. Federal Housing Administration (FHA) A division of the Department of Housing and Urban Development. Its main activity is the insuring of residential mortgage loans made by private lenders. FHA also sets standard for underwriting mortgages. Federal National Mortgage Association (FNMA) Also known as Fannie Mae. 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. FHA Loan A 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 Requires a small fee (up to 3 percent of the loan amount) paid at closing or a portion of this fee added to each monthly payment of an FHA loan to insure the loan with FHA. On a 9.5 percent $75,000 30-year fixed-rate FHA loan, this fee would amount t o either $2,250 at closing or an extra $31 a month for the life of the loan. In addition, FHA mortgage insurance requires an annual fee of 0.5 percent of the current loan amount, the more years the fee must be paid. First Mortgage The mortgage that has first claim (or "lien") in the event of a default. Fixed-Rate Mortgage A mortgage on which the interest rate is set for the term of the loan. Flood Insurance Insurance required for properties in federally designated flood areas.   Foreclosure A legal procedure in which property securing debt is sold by the lender to pay a defaulting borrower's debt . Freddie Mac See Federal Home Loan Mortgage Corporation. Go top

Ginnie Mae See Government National Mortgage Association. Government National Mortgage Association (GNMA) Also known as Ginnie Mae, provides sources of funds for residential mortgages, insured or guaranteed by FHA or VA. Graduated Payment Mortgage (GPM) A 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 The total amount the borrower earns per month, before any expenses are deducted. Guarantee A promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform according to a contract. Go top

Hazard Insurance A form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm and the like. Home Owners Insurance An insurance policy that combines liability coverage and hazard insurance.   Home Owners Warranty A type of insurance that covers repairs to specified parts of a house for a specific period of time. Housing Expenses-to-Income Ratio The ratio, expressed as a percentage, which results when a borrower's housing expenses are divided by his/her net effective income (FHA/VA loans) or gross monthly income (Conventional loans). Go top

Impound That portion of a borrower's monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as reserves. Interest The fee, or rent, charged by the lender for borrowing money.   Index A 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 (such as one- three-, and five-year U.S. Treasury Security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average Costs-of-Funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down. Investor Money source for a lender. Go top

Jumbo Loan A loan which is larger (more than $240,000) than the limits 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. Go top

Lien A claim upon a piece of property for the payment or satisfaction of a debt or obligation. Loan-To-Value Ratio The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage. Lock In A written agreement guaranteeing the home buyer (or refinance) a specified interest rate provided the loan closes with that buyer within a set period of time. Go top

Margin The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate. Market Value The highest price that a 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 at a given time. Mortgage Insurance Money paid to insure the mortgage when the down payment is less than 20 percent. See Private Mortgage Insurance or FHA Mortgage Insurance. Mortgagee The lender. Mortgagor The borrower or homeowner. Go top

Negative Amortization Occurs when the monthly payments are not large enough to pay all of the unpaid balance of the loan, therefore increasing the loan balance and going in a "negative" direction. In this particular scenario, a borrower can literally end up owing more money than they originally borrowed. The reason that this occurs is because on a negatively amortized loan, the borrower is given several different payment options. OPTION 1: To pay what is known as the fully indexed payment. This is the margin plus index on the adjustable. This payment, which is typically the highest of the options, will prevent you from going negative. OPTION 2: An interest only payment. You would not be going negative by making this payment either, but you would not be decreasing the principal balance that you owe on your loan. This is because you are paying only the interest portion, and no additional principal to your loan. OPTION 3: (And the one that most often gets people into trouble...) The negatively amortized payment. This is a payment that not only does not cover the principal, but doesn't cover all of the interest owed on the monthly payment, therefore accruing negative equity as a result. Net Effective Income The borrower's gross income minus federal income tax. Non-Assumption Clause A statement in a mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender. Notice of Default A formal written notice to a borrower that a default has occurred and that legal action may be taken. Go top

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. Go top

PITI Principal, interest, taxes, and insurance. Also called monthly housing expense. Piggy Back Loan Piggy Back Loan is a slang term, which is really another way of describing a First and Second Trust Deed that are closed concurrently at the close of escrow. This combination of a First and Second Trust Deed can be effectively utilized to avoid private mortgage insurance. The borrower may apply for a loan at 90% with the same 10% down payment. A First Trust Deed at 80% and the Second Trust Deed at 10% could be procured in this case. The interest rate on the Second Trust Deed is typically higher, often times in double digits. However, the fact that the interest can be deducted on this Second Trust Deed often makes this a prudent financial option for the customer. The net result is often cheaper than borrowing all 90% of the money as one loan and incurring the Private Mortgage Insurance (PMI). Points See Discount Points Power of Attorney A legal document authorizing one person to act on behalf of another. Prepaids Expenses necessary to create an escrow account or to adjust the seller's existing escrow account. Can include taxes, hazard insurance, private mortgage insurance and special assessments. Prepayment A privilege in a mortgage permitting the borrower to make payments in advance of their due date. Prepayment Penalty Money charged for an early repayment of debt. Prepayment penalties are allowed in some form (but not necessarily imposed) in 36 states and the District of Columbia. Prequalification The process of determining before a loan is applied for how much money a prospective home buyer will be eligible to borrow. Principal The amount of debt, not counting interest, left on a loan. Private Mortgage Insurance (PMI) Monthly insurance premium required in the event that you do not have a 20 percent down payment. Lenders will allow down payments less than 20 percent (as low as zero percent in some cases), but borrowers are usually required to carry private mortgage insurance (unless a Combination Loan is used). Go top

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 payments divided by your gross income. Go top

Realtor (Real Estate Agent) A person licensed and holding active membership in a local real estate board affiliated with the National Association of Realtors, able to negotiate and transact the sale of real estate on behalf of either the borrower or seller, or in some cases both parties. Rescission The cancellation of a contract. With respect to mortgage refinancing, the law that gives the homeowner three days to cancel a contract in some cases once it is signed if the transaction uses equity in the home as security. 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. Real Estate Settlement Procedures Act (RESPA) RESPA is a federal law that allows consumers to review information on known or estimated settlement costs once after application and once prior to or at settlement. The law requires lenders to furnish information after application only. Reverse Annuity Mortgage (RAM) A form of mortgage in which the lender makes periodic payments to the borrower using the borrower's equity in the home as security. Second Mortgage 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. Go top

Servicing All the steps and operations a lender perform to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, property inspections and the like. Settlement See Closing. Settlement Costs See Closing Costs. Shared Appreciation Mortgage (SAM) A mortgage in which a borrower receives 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 where the borrower shares the monthly principal and interest payments with another party in exchange for a part of the appreciation. Survey A measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any building. Go top

Term Mortgage See Balloon Payment Mortgage. Title A document that gives evidence of an individual's ownership of property. Title Company A company that specializes in title searches and insuring title to property.   Title Insurance A policy, usually issued by a Title Insurance company, which insures a homebuyer against errors in the title search. The cost of the policy is usually a function of the value of the property, and is often borne by the purchaser and/or seller. Title Search An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company. Transfer Tax State or local tax payable when title passes from one owner to another. Truth-in-Lending A federal law requiring disclosure of the Annual Percentage Rate to homebuyers shortly after they apply for the loan. Two-Step Mortgage A mortgage in which the borrower receives a below-market interest rate for a specified number of years (most often seven or 10 years), and then receives 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. Also called "Super Seven" or "Premier" mortgage. Go top

Underwriting The decision whether to make a loan to a potential homebuyer based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount. Go top

VA Loan A 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 A premium of up to 2 percent (depending on the size of the down payment) paid on a VA-backed loan. On a $75,000 30-year fixed-rate mortgage with no down payment, this would amount to $1,406 either paid at closing or added to the amount financed. Variable Rate Mortgage (VRM) See Adjustable Rate Mortgage. Verification of Deposit (VOD) A document signed by the borrower's financial institution verifying the status and balance of his/her financial accounts. Verification of Employment A document signed by the borrower's employer verifying his/her position and salary. Go top

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 taking the additional amount off the top. Go top

If you have any questions regarding Mortgage Loans, please check our FAQs page or contact us.

Dominic Boulter Real Estate Loans (831) 475-2600 loans@dboulter.com 5161 Soquel Drive Soquel, CA 95073 Home : Loan Application : Glossary : Calculators : FAQs : Newsletters : Testimonials : About / Contact Us Powered by: FM Technology & aidaSiGN