Adjustable Rate-An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly.
Amortization-A repayment method in which the amount you borrow is repaid gradually through 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 Membership-The amount charged annually for having a line of credit available. Often charged regardless of whether you use the line. Also referred to as a “participation fee.”
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. Does not include title insurance, appraisal and credit report.
Application–An initial statement of personal and financial information which is required to approve your loan.
Application Fee–Fees that are paid upon application. An application fee frequently includes charges for property appraisal ($200-$400) and a credit report ($30-$50).
Appraisal–A fee charged by an appraiser to render an opinion of market value as of a specific date. Required by most lenders to obtain a loan.
Assumption of Mortgage–The agreement of a purchaser to become primarily liable for the payments on a mortgage loan. Unless otherwise specified by the lender, the seller may remain secondarily liable for payments.
Balloon Payment–A lump sum payment for the unpaid 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.
Cash Out–Receiving money back when refinancing your present mortgage.
Ceiling–The maximum allowable interest rate over the life of the loan of an adjustable rate mortgage.
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, attorney’s 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 $203,150. Qualifying ratios and underwriting methods are standardized to a large degree.
Contract of Sale–The agreement between the buyer and seller on the purchase price, terms and conditions necessary for both parties to convey the title to the buyer.
Credit Limit–The maximum amount that you can borrow under a home equity plan.
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. Most lenders require the down payment to be paid from the buyer’s own funds. Gifts from related parties are sometimes acceptable, and must be disclosed to the lender.
Due on Sale–A clause in a mortgage agreement providing that, if the mortgagor (the borrower) sells, transfers or, in some instances, encumbers the property, the mortgagee (the lender) has the right to demand the outstanding balance in full.
Effective Interest Rate–The cost of credit on a yearly basis expressed as a percentage. 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. 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 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.
FHA Loan–More appropriately termed “FHA Insured Loan.” A loan for which the Federal Housing Administration insures the lender against losses the lender may incur due to your default.
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.
Home Equity Line of Credit--A loan providing you with the ability to borrow funds at the time and in the amount you choose, up to a maximum credit limit for which you have qualified. Repayment is secured by the equity in your home. Simple interest (interest-only payments on the outstanding balance) is usually tax-deductible. Often used for home improvements, major purchases or expenses and debt consolidation.
Home Equity Loan–A fixed or adjustable rate loan obtained for a variety of purposes, secured by the equity in your home. Interest paid is usually tax-deductible. Often used for home improvements freeing of other real estate. Recommended by many to replace or substitute for consumer loans with which interest is not tax-deductible such as auto or boat loans, credit card debt, medical debt and education loans.
Interest: a fee charged for the use of money .
Interest rate: the amount of interest charged on a monthly loan payment; usually expressed as a percentage.
Insurance: protection against a specific loss over a period of time that is secured by the payment of a regularly scheduled premium.
Judgment: a legal decision; when requiring debt repayment, a judgment may include a property lien that secures the creditor’s claim by providing a collateral source.
Lease purchase: assists low- to moderate-income homebuyers in purchasing a home by allowing them to lease a home with an option to buy; the rent payment is made up of the monthly rental payment plus an additional amount that is credited to an account for use as a down payment.
Lien: a legal claim against property that must be satisfied When the property is sold
Loan: money borrowed that is usually repaid with interest.
Loan fraud: purposely giving incorrect information on a loan application in order to better qualify for a loan; may result in civil liability or criminal penalties.
Loan-to-value (LTV) ratio.- a percentage calculated by dividing the amount borrowed by the price or appraised value of the home to be purchased; the higher the LTV, the less cash a borrower is required to pay as down payment.
Lock-in: since interest rates can change frequently, many lenders offer an interest rate lock-in that guarantees a specific interest rate if the loan is closed within a specific time.
Loss mitigation: a process to avoid foreclosure; the lender tries to help a borrower who has been unable to make loan payments and is in danger of defaulting on his or her loan
Margin: an amount the lender adds to an index to determine the interest rate on an adjustable rate mortgage.
Mortgage: a lien on the property that secures the Promise to repay a loan.
Mortgage banker: a company that originates loans and resells them to secondary mortgage lenders like :Fannie Mae or Freddie Mac.
Mortgage broker: a firm that originates and processes loans for a number of lenders.
Mortgage insurance: a policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan; mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home’s purchase price.
Mortgage insurance premium (MIP): a monthly payment -usually part of the mortgage payment – paid by a borrower for mortgage insurance.
Mortgage Modification: a loss mitigation option that allows a borrower to refinance and/or extend the term of the mortgage loan and thus reduce the monthly payments.
Offer: indication by a potential buyer of a willingness to purchase a home at a specific price; generally put forth in writing.
Origination: the process of preparing, submitting, and evaluating a loan application; generally includes a credit check, verification of employment, and a property appraisal.
Origination fee: the charge for originating a loan; is usually calculated in the form of points and paid at closing.
Partial Claim: a loss mitigation option offered by the FHA that allows a borrower, with help from a lender, to get an interest-free loan from HUD to bring their mortgage payments up to date.
PITI: Principal, Interest, Taxes, and Insurance – the four elements of a monthly mortgage payment; payments of principal and interest go directly towards repaying the loan while the portion that covers taxes and insurance (homeowner’s and mortgage, if applicable) goes into an escrow account to cover the fees when they are due.
PMI: Private Mortgage Insurance; privately-owned companies that offer standard and special affordable mortgage insurance programs for qualified borrowers with down payments of less than 20% of a purchase price.
Pre-approve: lender commits to lend to a potential borrower; commitment remains as long as the borrower still meets the qualification requirements at the time of purchase.
Pre-foreclosure sale: allows a defaulting borrower to sell the mortgaged property to satisfy the loan and avoid foreclosure.
Pre-qualify: a lender informally determines the maximum amount an individual is eligible to borrow.
Premium: an amount paid on a regular schedule by a policyholder that maintains insurance coverage.
Prepayment: payment of the mortgage loan before the scheduled due date; may be Subject to a prepayment penalty.
Principal: the amount borrowed from a lender; doesn’t include interest or additional fees.
Radon: a radioactive gas found in some homes that, if occurring in strong enough concentrations, can cause health problems.
Real estate agent: an individual who is licensed to negotiate and arrange real estate sales; works for a real estate broker.
REALTOR: a real estate agent or broker who is a member of the NATIONAL ASSOCIATION OF REALTORS, and its local and state associations.
Refinancing: paying off one loan by obtaining another; refinancing is generally done to secure better loan terms (like a lower interest rate).
Rehabilitation mortgage: a mortgage that covers the costs of rehabilitating (repairing or Improving) a property; some rehabilitation mortgages – like the FHA’s 203(k) – allow a borrower to roll the costs of rehabilitation and home purchase into one mortgage loan.
RESPA: Real Estate Settlement Procedures Act; a law protecting consumers from abuses during the residential real estate purchase and loan process by requiring lenders to disclose all settlement costs, practices, and relationships
Settlement: another name for closing .
Special Forbearance: a loss mitigation option where the lender arranges a revised repayment plan for the borrower that may include a temporary reduction or suspension of monthly loan payments.
Subordinate: to place in a rank of lesser importance or to make one claim secondary to another.
Survey: a property diagram that indicates legal boundaries, easements, encroachments, rights of way, improvement locations, etc.
Sweat equity: using labor to build or improve a property as part of the down payment
Title 1: an FHA-insured loan that allows a borrower to make non-luxury improvements (like renovations or repairs) to their home; Title I loans less than $7,500 don’t require a property lien.
Title insurance: insurance that protects the lender against any claims that arise from arguments about ownership of the property; also available for homebuyers.
Title search: a check of public records to be sure that the seller is the recognized owner of the real estate and that there are no unsettled liens or other claims against the property.
Truth-in-Lending: a federal law obligating a lender to give full written disclosure of all fees, terms, and conditions associated with the loan initial period and then adjusts to another rate that lasts for the term of the loan.
Underwriting: the process of analyzing a loan application to determine the amount of risk involved in making the loan; it includes a review of the potential borrower’s credit history and a judgment of the property value.
VA: Department of Veterans Affairs: a federal agency which guarantees loans made to veterans; similar to mortgage insurance, a loan guarantee protects lenders against loss that may result from a borrower default.