Mortgage Glossary

Accrued interest

Interest that has been accumulated but not paid, adding to the amount owed. Interest accrues each month on your mortgage. That is why when you refinance, your payoff amount is higher than your current balance.

Adjustable rate mortgage (ARM)

A mortgage on which the interest rate, after an initial period, can be changed by the lender. The initial rate for an ARM may be significantly lower than the current going rate for a fixed rate mortgage but could potentially be much higher after the specified initial period is over.

Amortization

The repayment of principal from scheduled mortgage payments that exceed the interest due. The scheduled payment less the interest equals amortization. The loan balance declines by the amount of the scheduled payment, plus the amount of any extra payment.

Application

A request for a loan that includes the information about the potential borrower, the property and the requested loan that the solicited lender needs to make a decision. In a narrower sense, the application refers to a standardized application form called the “1003″ which the borrower is obliged to fill out.

Annual percentage rate (APR)

It is a measure of credit cost to the borrower that takes account of the interest rate, points, and flat dollar charges by the lender. The charges covered by the APR also include mortgage insurance premiums, but not other payments to third parties, such as payments to title insurers or appraisers. The APR is adjusted for the time value of money, so that dollars paid by the borrower up-front carry a heavier weight than dollars paid in the future. However, the APR is calculated on the assumption that the loan runs to term, and is therefore potentially deceptive for borrowers with short time horizons.

Appraisal

An assessment of the value of a home performed by a licensed professional. Several factors play into determining a homes value. They include, but are not limited to: square footage of the home, comparable sales in the area, the condition of the home, geographical location,

Assumable mortgage

A mortgage contract that allows, or does not prohibit, a creditworthy buyer from assuming the mortgage contract of the seller. Assuming a loan will save the buyer money if the rate on the existing loan is below the current market rate, and closing costs are avoided as well.

Automated underwriting

A computer-driven process for informing the loan applicant very quickly, sometimes within a few minutes, whether the applicant will be approved, or whether the application will be forwarded to an underwriter. The quick decision is based on information provided by the applicant, which is subject to later verification, and other information retrieved electronically including information about the borrower’s credit history and the subject property.

Balloon mortgage

A mortgage which is payable in full after a period that is shorter than the term. In most cases, the balance is refinanced with the current or another lender. On a 7-year balloon loan, for example, the payment is usually calculated over a 30-year period, and the balance at the end of the 7th year must be repaid or refinanced at that time.

Bimonthly payment

A mortgage on which the borrower pays half the monthly payment every two weeks. Because this results in 26 (rather than 24) payments per year, the biweekly mortgage amortizes before term.

Buy-down

A permanent buy-down is the payment of points in exchange for a lower interest rate. A temporary buy-down concentrates the rate reduction in the early years.

Cash-out refinance

Refinancing for an amount in excess of the balance on the old loan plus settlement costs. The borrower takes “cash-out” of the transaction. This way of raising cash is usually an alternative to taking out a home equity loan.

Closing

On a home purchase, the process of transferring ownership from the seller to the buyer, the disbursement of funds from the buyer and the lender to the seller, and the execution of all the documents associated with the sale and the loan. On a refinance, there is no transfer of ownership, but the closing includes repayment of the old lender.

Closing costs

Costs that the borrower must pay at the time of closing, in addition to the down payment. These costs ordinarily include origination fees, appraisal fees, underwriting fees, title fees, etc.

Co-borrower

One or more persons who have signed the note, and are equally responsible for repaying the loan.

Conforming mortgage

A loan eligible for purchase by the two major Federal agencies that buy mortgages, Fannie Mae and Freddie Mac. The loan must follow their specialized underwriting guidelines for eligibility.

Correspondent lender

A lender (mortgage company) with capabilities allowing them to approve and fund their own loans. This gives them a competitive advantage over mortgage brokers, who are required to have their loans approved and funded by third party financial institutions.

Credit report

A report from a credit bureau containing detailed information bearing on credit-worthiness, including the individual’s credit history.

Credit score

A numerical score, based on an individual’s credit history, that measures an individual’s credit worthiness. A credit score can range anywhere between 350-800. Any score over 720 is considered excellent credit. Main factors that determine an individual’s score are account balances, account history, payment history, number of revolving accounts, etc. The most widely used credit score is called FICO for Fair Issac Co. which developed it.

Cumulative interest

The sum of all interest payments to date or over the life of the loan.

Deed

A legal written document by which title to property is transferred

Default

Failure of the borrower to honor the terms of the loan agreement. Lenders (and the law) usually view borrowers delinquent 90 days or more on their mortgage payment as ‘in default’.

Down payment

The monetary difference between the purchase price of the property and the loan amount, expressed in dollars, or as a percentage of the price. For example, if the house sells for $100,000 and the loan is for $80,000, the down payment is $20,000 or 20%. Most loan programs require a down payment but the amount will vary.

Earnest Money

The deposit money given to seller or his agent by the potential buyer at the time of the purchase offer. If the offer is accepted, the money will become part of the down payment.

Equity

In connection with a home, the difference between the value of the home and the balance of outstanding mortgage loans on the home. For example: if your home is worth $100,000 and you owe a total of $70,000 in loans on the home, you have $30,000 total equity.

Escrow

An agreement that money or other objects of value be placed with a third party for safe keeping, pending the performance of some promised act by one of the parties to the agreement. It is common for home mortgage transactions to include an escrow agreement where the borrower adds a specified amount for taxes and hazard insurance to the regular monthly mortgage payment. The money goes into an escrow account out of which the lender pays the taxes and insurance when they come due.

FHA mortgage

A mortgage on which the lender is insured against loss by the Federal Housing Administration, with the borrower paying the mortgage insurance premium. The major advantage of an FHA mortgage is that the required down payment is very low.

First mortgage

A first lien position on the property that secures the mortgage. A first mortgage has priority over all other liens or claims on a property in the event of default.

Fixed rate mortgage
A mortgage on which the interest rate and monthly mortgage payment remain unchanged throughout the term of the mortgage.

Good Faith Estimate

The form that lists the settlement charges the borrower must pay at closing, which the lender is obliged to provide the borrower within three business days of receiving the loan application.

Grace Period

The period after the payment due date during which the borrower can pay without being hit for late fees. Usually this period is fifteen days.

Hazard Insurance

Insurance purchased by the borrower, and required by the lender, to protect the property against loss from fire and other hazards. Also known as “homeowner insurance”.

Home equity line of credit

A mortgage set up as a line of credit against which a borrower can draw up to a maximum amount. You can draw on the line by writing a check, using a special credit card, or in other ways.

Housing expense

The sum of mortgage payment, hazard insurance, property taxes, and homeowner association fees.

Housing expense ratio

The ratio of housing expense to borrower income, which is used (along with the total expense ratio and other factors) in qualifying borrowers.

Initial interest rate

The interest rate that is fixed for some specified number of months at the beginning of the life of a an ARM. The initial rate is sometimes referred to as a “teaser rate”.

Interest only mortgage

A mortgage on which for some period the monthly mortgage payment consists of interest only. During that period, the loan balance remains unchanged.

Interest Rate

The rate charged the borrower each period for the loan of money, by custom quoted on an annual basis. A rate of 6%, for example, means a rate of 1/2% per month. A mortgage interest rate is a rate on a loan secured by a specific property.

Jumbo mortgage

A mortgage larger than the maximum eligible for purchase by the two Federal agencies, Fannie Mae and Freddie Mac, $417,000 in 2008. However, in that year, the agencies were given limited authority to purchase jumbos.

Lien

The lender’s right to claim the borrower’s property in the event the borrower defaults. If there is more than one lien, the claim of the lender holding the first lien will be satisfied before the claim of the lender holding the second lien, which in turn will be satisfied before the claim of a lender holding a third lien, etc.

Loan amount

The amount the borrower promises to repay, as set forth in the mortgage contract.

Loan officer

A person who serves as an intermediary between lending institutions and borrowers. They solicit loans, represent creditors to borrowers, and represent borrowers to creditors.

Loan-to-value ratio

The loan amount divided by the lesser of the selling price or the appraised value.

Lock

An option exercised by the borrower, at the time of the loan application or later, to “lock in” the rates prevailing in the market at that time. The lender and borrower are committed to those terms, regardless of what happens between that point and the closing date.

Lock period

The number of days for which any lock commitment is considered valid. Normal lock agreements can be found in 15, 30, 45, 60, and 90 day periods.

Maturity

The period until the last payment is due.

Mortgage

A written document evidencing the lien on a property taken by a lender as security for the repayment of a loan. The term “mortgage” or “mortgage loan” is used loosely to refer both to the lien and the loan. In most cases, they are defined in two separate documents: a mortgage and a note.

Mortgage Insurance

Insurance against loss provided to a mortgage lender in the event of borrower default. In most cases, the borrower pays the premiums.

Mortgage insurance premium

The up-front and/or periodic charges that the borrower pays for mortgage insurance. There are different mortgage insurance plans with differing combinations of up-front, monthly and annual premiums. The most widely used premium plan is a monthly charge with no upfront premium. FHA loans require both an upfront and monthly premium.

Mortgage payment

The monthly payment of interest and principal made by the borrower.

No-cost mortgage

A mortgage on which all settlement costs except per diem interest, escrows, homeowners insurance and transfer taxes are paid by the lender and/or the home seller. Most lenders charge a higher interest rate than the current going rate if a borrower chooses this option.

Note

A document that evidences a debt and a promise to repay. A mortgage loan transaction always includes both a note evidencing the debt, and a mortgage evidencing the lien on the property, usually in two documents.

Origination fee

An upfront fee charged by some lenders, usually expressed as a percent of the loan amount. It should be added to points in determining the total fees charged by the lender that are expressed as a percent of the loan amount.

Points

A fee lenders often charge if the borrower chooses to buy the interest rate down

Pre-approval

A commitment by a lender to make a mortgage loan to a specified borrower, prior to the identification of a specific property. It is designed to make it easier to shop for a house. Most sellers require a pre-approval letter to be submitted with an offer to verify the buyers can obtain financing for the property.

Prepayment

A payment made by the borrower over and above the scheduled mortgage payment.

Prepayment penalty

A charge imposed by some lenders if the borrower pays off the loan early. The charge is usually expressed as a percent of the loan balance at the time of prepayment, or a specified number of months interest. Prepayment penalties and charges are becoming less common.

Processing

Compiling and maintaining the file of information about a mortgage transaction, including the credit report, appraisal, verification of employment and assets, and so on. This part of the loan process takes place before underwriting.

Property flipping

Buying a property and selling it shortly thereafter for a higher price

Refinance

The replacement of an existing mortgage with a new mortgage under different terms. The new mortgage pays off the current mortgage and takes the first position lien against the property. Most reasons people those to refinance include reducing their interest rate, switch from a variable rate

RESPA

The Real Estate Settlement Procedures Act, a Federal consumer protection statute first enacted in 1974. RESPA was designed to protect home purchasers and owners shopping for settlement services by mandating certain disclosures, and prohibiting referral fees and kickbacks.

Settlement costs

Costs that the borrower must pay at the time of closing, in addition to the down payment. These costs are associated with setting up the mortgage and are often called “closing costs”.

Short sale

An agreement between a mortgage borrower in distress and the lender that allows the borrower to sell the house for less than is owed and remit the proceeds to the lender. It is an alternative to foreclosure, or a deed in lieu of foreclosure.

Streamlined refinance

Refinancing that omits some of the standard risk control measures (appraisals, verifying debt to income ratios, etc) and is therefore quicker and less costly. FHA offers a streamlined refinance to borrowers who currently have an FHA mortgage that would like to take advantage of lower rates.

Subordinate financing

A second mortgage on the property which is not paid off when a new loan is taken out. The second mortgage lender must agree to subordination of their second loan to the new first mortgage. They are allowing the new loan to remain in first position.

Teaser rate

The initial interest rate on an ARM before the adjustment periods.

Temporary buydown

A reduction in the mortgage payment in the early years of the loan in exchange for an upfront cash payment.

Title

Ownership of a property. A clear title is one without any outstanding liens or encumbrances. A cloud on title refers to any outstanding liens or encumbrances which could impair the title.

Title insurance

A policy designed to protect the buyer or lender after closing from financial losses arising from any defects in the title that may have occurred prior to purchase.

Truth in lending Act

The Federal law that specifies the information that must be provided to borrowers on different types of loans. Also, it is the name of the form used to disclose this required information. It is often issued by the lender with the Good Faith Estimate

Underwriting

The process of examining all the data about a borrower’s property and transaction to determine whether the mortgage applied for by the borrower should be issued. The person who does this is called an underwriter.

VA mortgage

A mortgage with no down payment requirement, available only to ex-servicemen and women as well as those on active duty, on which the lender is insured against loss by the Veterans Administration.